Department of Budget and Management

January 25, 2019 ITAD BIR RULING NO. 004-19 Tax Code Sections 106, 108 and 109; IBRD Articles of Agreement Sec 9 (A) Art. VII Department of Budget and Management Office of the Secretary General Solano Street, San Miguel 1005 Manila City Attention: Achilles Gerard C. Bravo Assistant Secretary Gentlemen : This refers to your letter dated 4 December 2018 in reference to this Bureau's letter to your Office dated 6 June 2018, requesting guidance on the applicable withholding taxes on the income payments made by the Department of Budget and Management (DBM) to the International Bank for Reconstruction and Development ( IBRD ) pursuant to the Reimbursable Advisory Services Agreement ( RAS Agreement ) entered into by the parties on 10 November 2017. Section 4.b of the RAS Agreement states that: (b) When due, all payments to the Bank hereunder shall be made in full within forty-five (45) days after the submission of an invoice by the Bank. Payment shall be made, in immediately available funds, without any deductions whatsoever for taxes, duties, charges or other withholdings ,and notwithstanding any pending dispute between the Parties, to such account as the Bank may from time to time designate in writing. (Underscoring supplied) In reply, please be informed as follows: I. Exemption from Value-Added Tax (VAT) Section 109 (1) (K) of the National Internal Revenue Code of 1997 ( Tax Code ),as amended, states that: 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; (Underscoring supplied) xxx xxx xxx Relative thereto, Section 9 (a),Article VII of the IBRD Articles of Agreement, provides: "Article VII STATUS, IMMUNITIES AND PRIVILEGES xxx xxx xxx SECTION 9. Immunities from Taxation (a) The Bank, its assets, property, income and its operations and transactions authorized by this Agreement, shall be immune from all taxation and from all customs duties. The Bank shall also be immune from the collection or payment of any tax or duty. xxx xxx xxx (Emphasis supplied) It must be noted that the Philippines was an original signatory to this IBRD Articles of Agreement. The membership of the Philippines to the Bank was authorized by Commonwealth Act No. 699 dated 20 November 1945. The treaty entered into force on 27 December 1945 and was proclaimed by the President through Proclamation No. 27, s. 1945. Considering that the Philippines is a signatory to the IBRD Articles of Agreement, the immunity from taxation on assets, property, income, official operations and transactions of the IBRD under the same is binding upon, and recognized by, the Philippines. In addition, purchases of goods and services by the IBRD from VAT-registered suppliers are considered zero-rated for VAT purposes pursuant to Sections 106 (A) (2) (b) and 108 (B) (3) of the Tax Code, as amended by Republic Act No. 10963, otherwise known as the Tax Reform for Acceleration and Inclusion Act, thus: SEC. 106. Value-Added Tax on Sale of Goods or Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to twelve percent (12%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor. xxx xxx xxx (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: xxx xxx xxx (b) Sales to persons and entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate. xxx xxx xxx SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. x x x (B) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: xxx xxx xxx (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate; xxx xxx xxx The purpose of these provisions is to maintain and recognize the exemption accorded by law to exempt entities such as the IBRD by treating the sales of VAT-registered suppliers to such entities as effectively zero-rated transactions and are, therefore, subject to zero percent (0%) VAT. This is inferred from the fact that under the above Tax Code provisions on zero-rating, it is not the person/entity accorded exemption under the law or international agreement who is given the zero-rating privilege and who benefits from the privilege of zero-rating but the sales by VAT-registered suppliers to such person/entity. II. Exemption from Income Tax In general, an income tax of 30% is imposed upon the taxable income derived during each taxable year from all sources within the Philippines by a foreign corporation. However, Section 32 (B) of the Tax Code excludes from the computation of gross income any income that is specifically exempted from taxation by any treaty obligation binding upon the Philippine Government, to wit: SEC. 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: 1 xxx xxx xxx (5) Income Exempt under Treaty . Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. Considering that the IBRD Articles of Agreement expressly provides for the exemption of the World Bank/IBRD from all forms of tax and that the Philippines considers said Agreement as a treaty, this Bureau hereby confirms the exemption of the bank from income tax. Accordingly, the income earned by the IBRD/World Bank from the rendition of services to the DBM is exempt from income tax and consequently from withholding tax. In sum, the World Bank/IBRD, its assets, property, income, operations and transactions, shall be exempt from all taxes, pursuant to Sections 109 (1) (K) and 32 (B) of the Tax Code in relation to Article VII, Section 9 (a) of the IBRD Articles of Agreement, and consequently exempt from withholding tax. Moreover, sales of goods and services by VAT-registered suppliers to the World Bank/IBRD are effectively zero-rated under Sections 106 (A) (2) (b) and 108 (B) (3) of the Tax Code. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. TITLE II TAX ON INCOME.