ITAD BIR Ruling No. 009-17

March 2, 2017 ITAD BIR RULING NO. 009-17 Agreement between the Philippines and USA concerning Cooperation in Countering the Proliferation of Weapons of Mass Destruction, Strengthening Maritime Security and for other Purposes (PH-US Cooperative Threat Reduction Agreement) A & E Equinet Architectural and Engineering Support Unit 904 Paragon Plaza EDSA corner Reliance St. Mandaluyong City Attention: AAA _______________ Gentlemen : This refers to your letter dated March 8, 2016 requesting confirmation of exemption from taxes and other similar charges on donation, purchase, importation into, exportation out of and use within the Philippines of any goods and services by A & E Equinet Architectural and Engineering Support (Equinet) , as one of the subcontractors of Raytheon Technical Services Company LLC (Raytheon) contractor of the Government of the United States of America , for the implementation of the Agreement between the Government of the Republic of the Philippines (GPH) and the Government of the United States of America (GUS) concerning Cooperation in Countering the Proliferation of Weapons of Mass Destruction, Strengthening Maritime Security and for other Purposes or the PH-US Cooperative Threat Reduction Agreement (CTRA or Agreement) . On the 15th-16th of October 2015, GPH and GUS ( Parties ) signed CTRA , a military agreement of executive nature. It has entered into force on February 5, 2016. Under CTRA , GPH gives its consent to the GUS to assist GPH in achieving the following objectives: caITAC a) Countering the proliferation of weapons of mass destruction (WMD), as well as related technology, materials and expertise into and from the territory of the Philippines; b) Preventing the unauthorized transfer, transport and transit of chemical, biological, radiological, and nuclear weapons and related technology and expertise into or through the territory of the Philippines, including any unauthorized transfer, transport and transit of weapons-usable chemical, biological, radiological, and nuclear materials; c) Enhancing capabilities related to early warning and detection mechanism for the outbreak of biological risks or threats; and d) Such other objectives as are mutually agreed to in writing by the Parties. It is represented that under Article II of CTRA , the U.S. Department of Defense ( DOD ) shall be the executive agent on behalf of GUS , whereas, the National Coast Watch Council ( NCWC ) of GPH shall be the executive agent on behalf of GPH ; that the Parties , through their executive agents, may conclude implementing agreements and arrangements to carry out the provisions of CTRA ; that the terms of CTRA shall apply to any future implementing agreements and arrangements and to the programs undertaken pursuant to the Agreement. It is represented that the above-mentioned objectives of CTRA will be implemented through the funding of GUS . However, expenditures by GUS , including associated costs shall be subject to the availability of appropriated funds to U.S. DOD or the responsible implementing agency, as provided under Article IV of CTRA . It is further represented that in order to implement the objectives of CTRA , GUS , through U.S. DOD and the Defense Threat Reduction Agency ( DTRA ), hired the services of Raytheon , a technology and innovation leader specializing in defense, civil government and cybersecurity markets throughout the world, on May 22, 2015; and that Raytheon engaged the services of Equinet , a registered domestic corporation engaged in architectural and engineering support, as one of its First Tier Subcontractors based on Purchase Order dated on July 3 and July 9, 2015. It is also represented that under Article IX on Prohibition on Transferees and Unauthorized Use, all the goods and services provided under CTRA are intended for the ownership and use of GPH ; and that GPH shall not transfer title to, or possession or control over, any goods or services provided under CTRA ; and that GPH shall not permit the use of such goods or services for purposes other than those for which they have been provided without the consent of GUS . Based on the above representations, Equinet seek confirmation of its exemption from taxes, particularly VAT, and other similar charges on donation, purchase, importation into, exportation out of and use within the Philippines of any goods and services provided under Article V of CTRA . In reply, please be informed that Section 105 and of the National Internal Revenue Code of 1997, as amended ("Tax Code") provides: " SEC. 105. Persons Liable. Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. . . ." However, Section 109 (1) (K) of the Tax Code exempts from VAT certain transactions which are exempt under international agreements to which the Philippines is a signatory, 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. . ." In this connection, Article V of CTRA provides: ICHDca " Article V: Importation and Exportation 1. Taxes, cost, duties and other similar charges imposed within the Republic of the Philippines on the donation, purchase, importation into, exportation out of, and use within the Philippines, by the Government of the United States of America and its contractors, of any goods and services needed to implement this Agreement shall be charged to the account of the executive agent or the responsible implementing agency of the Government of the Republic of the Philippines. 2. The charge of taxes on the account of the Government of the Republic of the Philippines will not apply to taxes on the income or profits of Philippine contractors." Furthermore, Article III on the Terms and Conditions of CTRA defines goods and services, US Government personnel, and contractors as follows: " Article III: Terms and Conditions xxx xxx xxx 3. For purposes of this Agreement: (a) the term "goods and services" shall refer to all materials, equipment, supplies, commodities, facilities, services, funds documents, records, technology, training, construction, property, personal property, or other assistance provided or used under this Agreement: (b) the term "U.S. Government personnel" shall refer to the civilian and military personnel of the Government of the United States of America: and (c) the term "contractors" shall refer, respectively, to individuals and entities under contract or subcontract with the military and civilian agencies of the Government of the United States of America, including contractors, subcontractors, consultants, suppliers, or sub-suppliers of goods and services or other assistance provided under this Agreement." Evidently, Article V of CTRA does not categorically provide for exemption from payment of taxes, particularly VAT . Instead, what CTRA provides is that the taxes, cost, duties and other similar charges imposed within the Philippines on the donation, purchase, importation into, exportation out of, and use within the Philippines of any goods and services needed for the implementation of CTRA by GUS and its contractors shall be charged to the account of the executive agent or the responsible implementing agency of GPH . This is a clear provision for assumption of tax liabilities and not tax exemption. Tax exemptions and assumption of tax liabilities are two distinct terms. Tax exemption is a grant of immunity from payment of tax. It is strictly construed against the taxpayer and liberally in favor of the taxing authority. 1 It can only be given force when the grant is clear and categorical. 2 There is no liability to pay taxes in tax exemption. Assumption of tax liabilities, on the other hand, does not provide for immunity from payment of taxes. It merely allows for the shifting of the burden of taxation by allowing another entity to shoulder the tax liability by means of charging or reimbursement. Hence, taxes are still required to be paid. Accordingly, Equinet , as one of the first tier subcontractors of Raytheon , is not exempt from payment of taxes. The tax liabilities, however, in connection with the implementation of CTRA , are assumed by the NCWC , the executive agent of GPH . In effect, the VAT payments of Equinet on the transactions under CTRA , shall be reimbursed by the NCWC . In view of the foregoing, Equinet is liable to pay VAT on its transactions related to the implementation of CTRA . Likewise, there is no legal basis that would entitle Equinet to a refund or tax credit. However, reimbursement shall be made from the NCWC with respect to VAT payments of Equinet pursuant to Art. V of CTRA from the time the said Agreement took effect on February 5, 2016. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed 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 Footnotes 1. Commissioner of Internal Revenue v. Visayan Electric Company , 132 Phil. 203, 215 (1968). 2. Commissioner of Internal Revenue v. Rio Tuba Nickel Mining Corporation , G.R. Nos. 83583-84, September 30, 1991, 202 SCRA 137.