ITAD BIR Ruling No. 002-22

January 31, 2022 ITAD BIR RULING NO. 002-22 Article V, Philippines-United States Cooperative Threat Reduction Agreement _________________ Legal Services Group Department of Finance Dear ________________ : This refers to your letter dated 20 January 2022 seeking for clarification on the implementation of the tax assumption provision of the PH-US CTRA. It must be recalled that on 22 April 2021, the BIR issued an opinion stating that the Agreement between the Government of the Republic of the Philippines and the Government of the United States of America Concerning Cooperation in Countering the Proliferation of Weapons of Mass Destruction, Strengthening Maritime Security and for Other Purposes , otherwise referred to as the Philippines-United States Cooperative Threat Reduction Agreement (PH-US CTRA) , does not grant tax exemption privilege to the United States Defense Threat Reduction Agency (DTRA), its contractors and third parties implementing a CTRA project, but only provides for a tax assumption on the part of the Philippine government, its executive agent or responsible implementing agency. The National Coast Watch Council (NCWC) is one of the implementing agencies of CTRA. Consistent therewith, the payment of all taxes imposed on the donation, purchase and importation into, exportation out of, and use within the Philippines by the US Government and its contractors, of any goods and services needed to implement the PH-US CTRA shall be the responsibility of the Philippine government, its executive agent or responsible implementing agency. The BIR likewise clarified that the taxes to be assumed do not include taxes on the income or profits of Philippine contractors. Despite the issuance of the said opinion, however, the parties still seek to clarify as to who will bear the taxes connected with a CTRA project. Thus, the Bureau hereby provides the following guidelines on the implementation of the tax assumption provision of the PH-US CTRA: VAT on Local Purchases 1. The VAT-registered supplier of goods, properties, and services that are needed for the implementation of CTRA projects or the VAT-registered subcontractor shall bill and pass on the twelve percent (12%) VAT to the contractor. In turn, the contractor shall seek/claim reimbursement of the VAT portion of the project cost from the concerned executing government agencies through the DTRA. The DTRA shall certify that the VAT being reimbursed from the concerned executing government agencies is connected with the CTRA project while the latter shall verify the veracity of the facts contained in the certification as well as the authenticity of the supporting documents. 2. The contractor (if doing business in the Philippines and is a VAT-registered taxpayer) or the VAT-registered subcontractor engaged to implement the CTRA project in the Philippines, as the case may be, shall file the prescribed VAT returns on gross receipts derived from a CTRA project, claim the input taxes on its purchases of goods, properties, or services and shall pay the output VAT thereon, after offsetting the creditable or allowable input taxes, considering that the amount intended for the payment of VAT has already been collected from the concerned executing government agencies. 3. In no case shall input taxes arising from transactions attributable to activities unrelated to a CTRA project be allowed or be credited against the output tax on gross receipts from the project. VAT on Importation (1) The 12% VAT on importation shall also be passed on and collected by the importer from the concerned executing government agencies through DTRA. Donor's Tax 1. Unless it is shown to be a tax-exempt donation under Section 101 (A) (B) of the 1997 Tax Code, as amended ( e.g. , donation to or for the use of the National Government or an entity created by any of its agencies which is not conducted for profit, or to any political subdivision of said Government), the donor's tax shall also be passed on and collected by the donor from the concerned executing government agencies through DTRA. 2. The Donor's Tax Return or BIR Form No. 1800 shall be filed by the donor within thirty (30) days after the gift or donation is made. To illustrate, let us suppose that DTRA contracted Neon Co., a company doing business in the United States of America (US), to implement a CTRA project. To assist it in purchasing the necessary equipment and in general, oversee the implementation of the said project in the Philippines, Neon Co. subcontracted ABC Co., a VAT-registered domestic corporation. In exchange for ABC Co.'s services, Neon Co. pays it a fixed fee of Php1,120,000.00, inclusive of VAT, payable upon the completion of the contract. During the implementation, ABC Co. acquired an equipment amounting to Php3,360,000.00, inclusive of VAT, from XYZ, another VAT-registered domestic corporation. In this case, ABC Co. shall bill Neon Co. Php4,480,000.00 for the services it rendered and for the equipment it purchased for the CTRA Project. Neon Co. shall, in turn, bill DTRA 4,000,0000.00 for the total cost of the project, exclusive of VAT, and claim reimbursement of the VAT amount of 480,000 from the executing government agency also through DTRA. It may be gleaned from this illustration that the VAT liability still exists and rests with the subcontractor (ABC Co.). However, the burden thereof is not borne by the immediate purchaser (Neon Co. or DTRA) but is assumed by another person (executing government agency). Therefore, ABC Co. is still obligated to file its VAT return and pay the VAT due and payable (output VAT less input VAT), if any. Finally, it must be emphasized that the foregoing rules are in accordance with the provisions of Revenue Memorandum Circular No. 8-2017, which was issued by the BIR to clarify the application of the tax assumption provision of the Exchange of Notes, an agreement usually executed by the Philippine government and the Government of Japan for Overseas Economic Cooperation Fund (OECF)-Funded Projects. This ruling is issued on the basis of the facts as represented. However, if it will be disclosed upon investigation that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue