ITAD BIR Ruling No. 001-09

January 14, 2009 ITAD BIR RULING NO. 001-09 Section 109 National Internal Revenue Code of 1997, as amended; Article VI, Section 28; Article VII, Section 21-1987 Philippine Constitution; Section 14 General Appropriations Act of 1997 Philippine National Railways Office of the General Manager PNR Executive Bldg., Mayhaligue Street Tutuban, Manila City Attention: Jose Ma. I. Sarasola II General Manager Gentlemen : This refers to your letter dated 03 April 2008 bringing to this Bureau's attention the request of HANJIN HEAVY INDUSTRIES & CONSTRUCTION CO. LTD. (hereinafter referred to as "Hanjin" ), a corporation contracted by the PHILIPPINE NATIONAL RAILWAYS to undertake the civil aspects of the NORTHRAIL-SOUTHRAIL LINKAGE PROJECT, SOUTH COMMUTER RAIL PROJECT, PHASE I, for the issuance of certificate of value-added (VAT) tax exemption for the suppliers and subcontractors of Hanjin. HEIcDT It is represented that the Philippine National Railways (hereinafter referred to as "PNR") is currently implementing the Northrail-Southrail Linkage Project-Phase I (hereinafter referred to as "Project" ) which involves the rehabilitation of the section of the PNR line from Caloocan to Alabang; that the Project is being funded by a mixed credit facility granted by the Economic Development Cooperation Fund (EDCF) of the Government of Korea and the Export-Import Bank of Korea (KEXIM) by way of Loan Agreement No. PHL-7 signed on 07 May 2004 by and between The Philippine National Railways, Republic of the Philippines, as the 'Borrower' and The Export-Import Bank of Korea, as the 'Lender'; that Part 8, Section 22, paragraph (g) of the Loan Agreement provides that "All taxes, duties, and levies imposed in the Philippines on the Consulting Services shall be either made exempt or borne by the Borrower"; that PNR does not have the financial capability to shoulder these taxes; that the civil aspect of the Project is being undertaken by a consortium composed of Daewoo International, Hanjin and Rotem Company; that the works started on 29 June 2007 and are expected to be completed, including the delivery, testing and commissioning of the rolling stock, in the latter part of 2009; that Hanjin, the general contractor, has engaged the services of sub-contractors for some aspects of the civil works. Based on the aforequoted provision of the Loan Agreement, Hanjin now requests for a certificate of VAT exemption from this Bureau for their suppliers and sub-contractors so that invoices and billings charged to them would be VAT-exempt. In reply, please be informed as follows. On the matter of issuance of a VAT exemption certificate, please be clarified that VAT exemption certificates (VECs) are issued by the Bureau of Internal Revenue only to embassies/qualified embassy personnel in the Philippines based on the principle of reciprocity and pursuant to Revenue Memorandum Order No. 22-2004 dated 24 May 2004. All the other requests for VAT exemption are confirmed by this Bureau through the issuance of a BIR Ruling. On the matter of your request regarding the exemption of Hanjin suppliers and subcontractors from VAT on the Project, please be informed that Section 109 (K) of the National Internal Revenue Code (Tax Code) of 1997, as amended by Republic Act No. 9337 , governs the VAT exemption privileges which are embodied in an agreement. It provides, viz. : "SEC. 109. Exempt Transactions. (1) Subject to the provisions of subsection (2) hereof, the following transactions shall be exempt from the value-added tax: xxx xxx xxx (K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529; xxx xxx xxx." With respect to tax exemptions, this Office emphasizes that axiomatic in the law of taxation is that taxes are the lifeblood of the nation. Hence, exemption therefrom is highly disfavored in law and he who claims tax exemption must be able to justify his claim or right. (Afisco Insurance Corp., et al. vs. Court of Appeals, et al., G.R. No. 112675, 25 January 1999) aHCSTD In the case of Philippine Long Distance Telephone Company, Inc. v. City of Davao , 1 the Supreme Court held that: "When a tax exemption is claimed, it must be shown indubitably to exist. At the outset, every presumption is against it. A well-founded doubt is fatal to the claim. It is only when the terms of the concession are too explicit to admit fairly of any other construction that the proposition can be supported." TDaAHS A cursory reading of the aforequoted Loan Agreement cited as a basis for the instant request for VAT exemption will reveal that there is no clear grant of tax exemption. Specifically, Part 8, Section 22 (g) of the Loan Agreement provides that: "All taxes, duties, and levies imposed in the Philippines on the Consulting Services shall be either made exempt or borne by the Borrower". Furthermore, in determining whether or not the aforequoted provision of the Loan Agreement may serve as a legal basis for tax exemption, there is a need to look into the nature of the Loan Agreement itself. Generally speaking, taxation is legislative in character and is a legislative prerogative. 2 This legislative taxing power includes the authority to grant tax exemptions or condonations. 3 Such exemption is embodied either in a law, an international agreement (other than an executive agreement) or a treaty, all of which require legislative action for their validity, as prescribed under the 1987 Philippine Constitution, as follows: "ARTICLE VI LEGISLATIVE DEPARTMENT xxx xxx xxx SEC. 28. No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress." "ARTICLE VII EXECUTIVE DEPARTMENT xxx xxx xxx SEC. 21. No treaty or international agreement shall be valid and effective unless concurred in by at least two-thirds of all the Members of the Senate." ISCDEA Thus, as the power to tax is inherently a legislative prerogative, the same cannot be exercised through a mere executive agreement. Executive agreements differ from the type of international agreements referred to under Section 21 above, as seen in the case of Commissioner of Customs vs. Eastern Sea Trading, 3 SCRA 351 (1961) , where the Supreme Court said ". . . International agreements involving political issues or changes of national policy and those involving international agreements of a permanent character usually take the form of treaties. But international agreements embodying adjustments of detail carrying out well-established national policies and traditions and those involving arrangements of a more or less temporary nature usually take the form of executive agreements." 4 Furthermore, as to the nature of executive agreements, Constitutional law expert Fr. Joaquin G. Bernas, S.J., discusses in his book that ". . . through such executive agreements the President merely carries out his duty to 'ensure that the laws be faithfully executed'. 5 What the President does in such a situation would not be unlike the formulation of administrative regulations by administrative agencies pursuant to a delegating law. Administrative regulations do not need confirmation by Congress but draw their strength from the delegating law". HcSaTI In other words, provisions in an executive agreement may only be given effect if the same are done in furtherance of the executive's duty to ensure faithful execution of laws and only if the same draws strength from a law duly passed by Congress. In order to uphold the validity of the tax provision in the subject Loan Agreement, it must be determined, based on the foregoing discussion, whether the Loan Agreement is in the nature of a law, an international agreement (requiring concurrence), a treaty, or an executive agreement. As it is, the Loan Agreement is simply an executive agreement, and there is no showing that the same is intended to be elevated into the status of a treaty or an international agreement that requires Senate concurrence. For this reason, Part 8, Section 22 (g) of the Loan Agreement cannot be used as a legal basis for the grant of VAT exemption for the suppliers and subcontractors of Hanjin. cCAIaD At the most, however, the intended exemption provided in the Loan Agreement may be achieved not through a direct grant of tax exemption, but through the assumption by the PNR of the taxes on the payments for consulting services relative to the Project. In relation to the assumption to be made by PNR of the VAT on the subject payments, it is worth mentioning that Section 14 of the General Appropriations Act quoted below, provides for the appropriation for national internal revenue taxes, to wit: "Sec. 14. National Internal Revenue Taxes and Import Duties. The following are deemed automatically appropriated: (a) National internal revenue taxes and import duties payable by national government agencies to the national government arising from foreign donations, grants and loans; . . .". (Emphasis supplied) In view of all of the foregoing, this Office is of the opinion and so holds that the services rendered by Hanjin (the general contractor), and its suppliers and sub-contractors for some aspects of the civil works, to PNR are not exempt from VAT. Consequently, PNR, being the herein executing entity, shall be made to assume the VAT due therefrom, pursuant to the provisions of the Loan Agreement. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Commissioner of Internal Revenue Footnotes 1. 415 Phil. 764 (2001). 2. Tax Law and Jurisprudence by Vitug and Acosta, citing National Power Corporation vs. Albay , 186 SCRA 198. 3. Ibid. , citing Petro vs. Pililia , 198 SCRA 82. 4. The 1987 Constitution of the Philippines, A Commentary by Bernas quoting from Commissioner of Customs vs. Eastern Sea Trading , 3 SCRA 351 (1961). 5. Article VII, Section 17 of the Philippine Constitution.