Embassy of the Federal Republic of Germany

May 19, 2021 ITAD BIR RULING NO. 013-21 Sec. 106 (A) (2) (b), NIRC of 1997, as amended; Diplomatic Exchange of Notes (May 6, 2002); Technical Co-operation Agreement (1971) Embassy of the Federal Republic of Germany 25th Floor, The RCBC Plaza, Tower 2 6819 Ayala Avenue, Makati City Attention: AAA _______________ Gentlemen : This refers to your requests for exemption from value-added tax (VAT) and ad valorem tax on the local purchase of four (4) motor vehicles (the subject motor vehicles) to be used for the projects funded by Deutsche Gesellschaft fr Internationale Zusammenarbeit (GIZ), 1 and to be implemented by the Department of Environment and Natural Resources and the Climate Change Commission, to wit: PROJECT NAME MOTOR VEHICLE IMPLEMENTING GOVERNMENT AGENCY Improved Ecosystem Services and Reduced Vulnerability to Climate Change through Ecosystem-based Management and Application of Ecosystem Values in Two River Basins in the Philippines 2 units of 2021 Toyota Hilux 4x4 2.4J Diesel MT 1 unit of Toyota Innova 2.8 J Diesel MT Department of Environment and Natural Resources South-South Collaboration on Climate Information and Services: Building a Knowledge-management and Learning Platform for the Philippines and the Climate Vulnerable Forum 2021 Toyota Rush 1.5G, AT 7S Climate Change Commission In reply, please be informed that Section 106 (A) (2) (b) of the 1997 National Internal Revenue Code (NIRC), as amended by Republic Act No. 10963, otherwise known as the Tax Reform for Acceleration and Inclusion Act (TRAIN Law), provides as follows: HTcADC "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 or 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. 109. Exempt Transactions. (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax. (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 foregoing provisions, sales of goods or properties made by VAT-registered persons are generally subject to 12% VAT except when a special law or an international agreement to which the Philippines is a signatory effectively subjects such sale to zero percent (0%) VAT or exempts the transaction from VAT. The Embassy of the Federal Republic of Germany is of the view that the sale of the subject motor vehicles is exempt from VAT and ad valorem taxes pursuant to the Agreement between the Government of the Federal Republic of Germany and the Government of the Republic of the Philippines Concerning Technical Co-operation (Technical Co-operation Agreement or TCA) executed on September 7, 1971, in relation to the Diplomatic Exchange of Notes dated May 6, 2002, which constitute the Arrangement between the two countries concerning the continuation of the local office of the GIZ in Manila ("2002 E/N"),and the Diplomatic Exchange of Notes dated January 28, 2019 and April 8, 2019 (hereinafter referred to as "January 2019 E/N" and "April 2019 E/N," or "2019 E/N"),which constitute the Arrangements concerning the projects "Improved Ecosystem Services and Reduced Vulnerability to Climate Change through Ecosystem-based Management and Application of Ecosystem Values in Two River Basins in the Philippines" and "South-South Collaboration on Climate Information and Services: Building a Knowledge-management and Learning Platform for the Philippines and the Climate Vulnerable Forum," respectively. While the TCA partakes the nature of an international agreement referred to under Section 106 (A) (2) (b) of the NIRC, the Diplomatic Exchange of Notes, on the other hand, is considered a form of an executive agreement, which becomes binding through executive action without the need of a vote by the Senate or Congress. 2 Article 4 (5) and Article 5 (3) of the TCA and paragraph 4 (a) of the 2002 E/N provide as follows: "Article 4 The Government of the Republic of the Philippines shall: xxx xxx xxx (5) exempt from harbor dues, import and export duties, and all other public charges the articles supplied on behalf of the Government of the Federal Republic of Germany for the projects ; xxx xxx xxx Article 5 xxx xxx xxx (3) exempt the German experts, teachers and technicians, their families and other members of their households, for the duration of their stay, from all import and export duties and other fiscal charges in respect of effects intended for their personal use, provided that such articles shall be re-exported; such effects shall include, for each household, one motor vehicle, one refrigerator, one deep freezer, one radio, one record player, one tape recorder, one television set, minor electrical appliances and, or each person, one air-conditioner, one set of photographic and cine equipment. xxx xxx xxx" (Emphasis supplied) "4. The Government of the Republic of the Philippines shall make the following contributions: It shall (a) exempt the material and motor vehicles supplied for the Office from taxes, licenses, harbour dues, import and export duties and other public charges, as well as storage fees, and ensure that such material is cleared by customs without delay. The aforementioned exemptions shall, with regard to value-added tax (VAT),also apply to material and services (including consulting services) procured in the Republic of the Philippines ,as well as to the renting of office premises and accommodation for seconded experts;" (Emphasis supplied) Nothing in the abovementioned provisions exempts the sale of the subject motor vehicles from VAT. Article 4 (5) of the TCA refers to articles supplied on behalf of the Government of the Federal Republic of Germany for the projects, while Article 5 thereof covers, among others, imported motor vehicle. A cursory reading of paragraph 4 (a) of the 2002 E/N, on the other hand, reveals that the first sentence deals with the tax exemption of imported materials and motor vehicles while the second sentence deals with the exemption from VAT of material and services, including consultancy services, procured in the Philippines. The latter sentence excluded the locally purchased motor vehicles from the list of VAT-exempt goods and services procured in the Philippines. Applying the familiar maxim, expressio unius est exclusio alterius ,the express mention of one person, thing, or consequence implies the exclusion of all others. CAIHTE An examination of the following provisions of the January 2019 and April 2019 E/N also leads to the conclusion that the sale of the subject motor vehicles is not exempt from VAT, thus: "5. Details of the project specified in paragraph 1 and of the contributions and obligations specified in paragraph 3 shall be governed by individual implementation agreements and, where appropriate, a financing agreement, to be concluded between GIZ and the implementing agencies to be charged by the Government of the Republic of the Philippines with the implementation of the Project, which shall be subject to the laws and regulations applicable in the Federal Republic of Germany. 7. The Government of the Republic of the Philippines shall, by itself or through its implementing agencies, assume all import and export duties, harbor dues and other public charges imposed by the Republic of the Philippines on the materials, motor vehicles ,goods, items or equipment and spare parts imported on behalf and at the expense of the Government of the Federal Republic of Germany and used for the project specified in paragraph 1, and shall ensure that these inputs are released without delay. 9. At the request of GIZ ,the Government of the Republic of the Philippines shall, by itself or through its implementing agencies, assume value-added tax or any similar indirect taxes imposed by the Republic of the Philippines solely on the goods and services procured in connection with the conclusion and fulfillment of the implementation and financing agreements referred to in paragraph 5. Any specific consumption taxes levied solely on goods and services procured shall, on request ,be assumed by the Government of the Republic of the Philippines, by itself or through its implementing agency." (Emphases supplied) Contrary to the allegations of GIZ, the 2019 E/N granted no tax exemption to GIZ and did not provide for the VAT exemption of the subject motor vehicles. The foregoing provisions relate to the tax obligations assumed by the Philippine Government or its agencies charged with the implementation of the Projects, i.e. ,the Department of Environment and Natural Resources (DENR) and the Climate Change Commission (CCC),upon request of the GIZ, and not to the VAT exemption of GIZ or of the sale transaction. Clearly, paragraph 9 states that the Philippine Government may assume the payment of VAT imposed on the goods and services procured in connection with the implementation of the projects only if so requested by the GIZ. In this case, the GIZ failed to present any documentary evidence to prove that the GIZ requested the Philippine Government, the DENR or CCC to assume the VAT imposed on the subject motor vehicles. Without such request, the Philippine Government cannot be made liable for the said tax. It must be emphasized that a taxpayer claiming tax exemption must be able to justify such claim by the clearest grant of statute. It is the taxpayer's duty to prove the same by words too plain to be mistaken and too categorical to be misinterpreted. Also, the grant of tax exemption is a power vested in the Congress. Article VI (The Legislative Department), Section 28 (4) of the 1987 Philippine Constitution provides that "no law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress." Therefore, a mere executive agreement cannot validly grant tax exemption. In view of all the foregoing, the request for exemption from VAT and ad valorem tax on the local purchase of two (2) 2021 Toyota Hi-Lux 4x4 2.4J Diesel M/T, one (1) Toyota Innova 2.8 J diesel MT and one (1) Toyota Rush 1.5G AT 7S is denied for lack of legal basis. Accordingly, the GIZ shall pay the corresponding indirect taxes on the subject motor vehicles. aScITE Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. GIZ is the new name of Deutsche Gesellschaft fr Technische Zusammenarbeit (GTZ) effective January 1, 2011, per Note No. 275/10 dated December 1, 2010 of the Embassy of the Federal Republic of Germany and DFA Note No. 11-0197 dated January 31, 2011. 2. Abaya v. Ebdane ,544 Phil. 645 (2007).