ITAD BIR Ruling No. 012-10

June 29, 2010 ITAD BIR RULING NO. 012-10 Article 109 of the Tax Code of 1997, as amended Department of Foreign Affairs 2330 Roxas Blvd. Pasay City, 1300 Attention: Ms. Maria Cynthia P. Pelayo Director for Immunities and Privileges Office of Protocol and State Visits Gentlemen : This refers to your letter dated August 29, 2007, requesting this Bureau's opinion on the value-added tax (VAT) exemption privilege of the United Nations Children's Fund (UNICEF) on the purchase of domestic airline tickets. AaSCTD In reply, please be informed that Section 109 of the National Internal Revenue Code of 1997 (NIRC), as amended by Section 7 of Republic Act No. 9337 dated November 1, 2005, provides as follows: "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" Based on the above provision, the UNICEF and its personnel may only be exempt from VAT when there is an express provision to this effect in a relevant international agreement entered into by the Republic of the Philippines concerning this agency. In relation thereto, Article VI of the Agreement between the United Nations Children's Fund and the Government of the Philippines dated November 20, 1948 provides: "Article VI Immunity from Taxation A. The Fund, its assets, property, income and its operations and transactions of whatever nature, shall be immune from all taxes, fees, tolls, or duties imposed by the Government or by any political sub-division thereof of by any other public authority in the Philippines. The Fund shall also be immune from liability for the collection or payment of any tax, fee, toll, or duty imposed by the Government or any political sub-division thereof or by any other public authority. xxx xxx xxx C. The Government will take such action as is necessary for the purpose of making effective the foregoing principles. In addition, the Government will take whatever other action may be necessary to insure that supplies and services furnished by the Fund are not subjected to any tax, fee, toll, or duty in a manner which reduces the resources of the Fund." Moreover, Article VII of the above-mentioned agreement states that: "Article VII Privileges and Immunities The Government will grant to the Fund and its personnel the privileges and immunities contained in the general convention on privileges and immunities adopted by the General Assembly of the United Nations on 13 February 1946." SaICcT Relative thereto, please be informed that exemption from taxes accorded under the Convention on the Privileges and Immunities of the United Nations, Adopted by the General Assembly of the United Nations (UN Convention) on 21 November 1946 , are embodied under Article III, Sections 9 and 10 thereof which state that: "Article III Property, Funds and Assets xxx xxx xxx "Section 9 The specialized agencies, their assets, income and other property shall be: a. exempt from all direct taxes: it is understood, however, that the specialized agencies will not claim exemption from taxes which are, in fact, no more than charges for public utility services; xxx xxx xxx" "Section 10 While the specialized agency will not, as a general rule, claim exemption from excise duties and from taxes on the sale of movable and immovable property which form part of the price to be paid, nevertheless when the specialized agencies are making important purchases for official use of property on which such duties and taxes have been charged or are chargeable, States parties to this convention will, whenever possible, make appropriate administrative arrangements for the remission or return of the amount of duty or tax." (Emphasis supplied) Accordingly, under the Convention on the Privileges and Immunities of the (UN) Specialized Agencies, the UNICEF is generally not exempt from VAT and excise taxes. However, important purchases of property for the official use of the UNICEF shall be exempt from payment of taxes chargeable to such property ( e.g. , VAT). Property, in the legal context, is defined as anything which is or may be the object of appropriation. 1 It may either be immovable and/or real property or movable and/or personal property. 2 The following are immovable property: (1) Land, buildings, roads and constructions of all kinds adhered to the soil; (2) Trees, plants, and growing fruits, while they are attached to the land or form an integral part of an immovable; (3) Everything attached to an immovable in a fixed manner in such a way that it cannot be separated therefrom without breaking the material or deterioration of the object; (4) Statues, reliefs, paintings or other objects for use or ornamentation, places in buildings or lands by the owner of the immovable in such a manner that it reveals the intention to attach them permanently to the tenements; (5) Machinery, receptacles, instruments or implements intended by the owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and which tend directly to meet the needs of the said industry or works; (6) Animal houses, pigeon houses, beehives, fish ponds or breeding places of similar nature, in case their owner has placed them or preserves them with the intention to have them permanently attached to the land and forming a permanent part of it; the animals attached in these places are included; AcHEaS (7) Fertilizer actually used on a piece of land; (8) Mines, quarries and slag dumps, while the matter thereof forms part of the bed and waters either running or stagnant; (9) Docks and structures which, though floating are intended by their nature and object to remain at a fixed place on the river, lake, or coast; (10) Contracts for public works, and servitudes and other real rights over immovable property. 3 On the other hand, the following things are deemed to be personal property: (1) Those movables susceptible of appropriation which are not included in Article 415; (2) Real property which by any special provision of law is considered as personalty; (3) Forces of nature which are brought under control by science; (4) In general, all things which can be transferred from place to place without impairment of the real property to which they are fixed. 4 The following are also considered personal property: (1) Obligations and actions which have for their object movables or demandable sums; and (2) Shares of stock of agricultural, commercial and industrial entities, although they may have real estate. 5 The tests to determine whether an object is movable or not are: (1) Whether the object can be transported from place to place; (2) Whether the change of location can take place without injury to the immovable to which it may be attached; and (3) Whether it is not included in the enumeration found in Article 415 of the Civil Code. Applying the above definitions and discussions on property, it is clear that the subject transaction between UNICEF and Philippine Airline cannot be considered purchase of property. Moreover, it is worthy to note that the subject transaction involves a contract of carriage of passengers whereby PAL bind themselves to transport the passengers who availed of the services from place of origin to place of destination and such is usually evidenced by an airline ticket. Such undertaking is clearly a purchase of service and not a purchase of property (immovable/real or movable/personal). In view thereof, this Office is of the opinion that the subject purchase of airline tickets, although an official transaction of the UNICEF, not being purchase of property but rather, purchase of service, is not exempt from VAT. THaDAE Very truly yours, (SGD.) JOEL L. TAN-TORRES Commissioner of Internal Revenue Footnotes 1. Article 414, Civil Code of the Philippines. 2. Ibid. 3. Article 415, Ibid. 4. Article 416, Ibid. 5. Article 417, Ibid.