ITAD BIR Ruling No. 017-09

June 23, 2009 ITAD BIR RULING NO. 017-09 Section 106 and Section 109, National Internal Revenue Code of 1997, as amended; Section 5, Revenue Regulations No. 4-2007; Headquarters Agreement Between the Government of the Republic of the Philippines and the International Rice Research Institute International Rice Research Institute UPLB Compound College Los Baos, Laguna Attention: Mr. Norman Macdonald Treasurer and Director for Management Services Gentlemen : This refers to your letter dated 17 March 2009, forwarded to this Office by the Department of Foreign Affairs and the Department of Finance, requesting for a value-added tax (VAT) exemption ruling on the official purchase by the International Rice Research Institute (IRRI) of motor vehicles, specifically described as follows: Make Model Color Engine Number Chassis Number Year 1. Toyota Corolla 2008 Xtreme Black 3ZZ-4822049 MR053ZEE106126777 Altis 1.6 G A/T 2. Toyota Corolla 2008 Xtreme Black 3ZZ-4823863 MR053ZEE106127273 Altis 1.6 G A/T 3. Toyota Corolla 2008 Medium Silver 3ZZ-4822105 MR053ZEE106127023 Altis 1.6 G A/T Metallic 4. Toyota Corolla 2008 Medium Silver 3ZZ-4822729 MR053ZEE106126913 Altis 1.6 G A/T Metallic 5. Toyota Corolla 2008 Medium Silver 3ZZ-4823877 MR053ZEE106127283 Altis 1.6 G A/T Metallic 6. Toyota Corolla 2008 Thermalyte 3ZZ-4779878 MR053ZEE106112786 Altis 1.6 G A/T 7. Toyota Corolla 2008 Thermalyte 3ZZ-4797738 MR053ZEE106118991 Altis 1.6 G A/T 8. Toyota Corolla 2008 Thermalyte 3ZZ-4803392 MR053ZEE106121012 Altis 1.6 G A/T 9. Toyota Corolla 2008 Beige Metallic 3ZZ-4826338 MR053ZEE106127857 Altis 1.6 G A/T 10. Toyota Corolla 2008 Beige Metallic 3ZZ-4826124 MR053ZEE106127799 Altis 1.6 G A/T 11. Toyota Avanza 2009 Silver Metallic DBB8545 MHFM1CF3F8K002669 1.5 G A/T 12. Toyota Hilux 2009 Lithium 2KD-7691541 MR0ER39GX08700074 4X2 G DSL MT 2.5 5S 13. Toyota Hilux 2009 Lithium 2KD-7691547 MR0ER39G508700077 4X2 G DSL MT 2.5 5S 14. Toyota Hilux 2009 Freedom White 2KD-6200578 MR0CS12G800067390 4X2 2.5L J M/T 15. Toyota Hilux 2009 Freedom White 2KD-6198570 MR0CS12G200067210 4X2 2.5L J M/T 16. Toyota HiACE 2009 White 2KD-1877423 JTFJS02P800017158 Commuter 2.5 5S 17. Toyota HiACE 2009 Silver Metallic 2KD-1906125 JTFRS13P600015206 Grandia 1T 2.5 5S 18. Toyota HiACE 2008 Silver Metallic 2KD-1862364 JTFRS13PX00013782 Grandia 1T 2.5 5S 19. Mitsubishi 2009 Aspen White 4D56-AAB8465 PAEL35NY18B020117 L300 CC w/Pet Body 20. Mitsubishi 2009 Aspen White 4D56-AAB8456 PAEL35NY18B020112 L300 CC w/Pet Body 21. Mitsubishi 2009 Aspen White 4D56-AAB8478 PAEL35NY18B020121 L300 CC w/Pet Body Documents submitted show that IRRI was established on 09 December 1959 at Los Baos, Laguna by virtue of a Memorandum of Understanding between the Government of the Republic of the Philippines and the Ford and Rockefeller Foundations as an autonomous philanthropic, tax-free, non-profit, non-stock organization designed to conduct research on the rice plant and on all phases of rice production with a view of attaining nutritive, economic and ecological benefits for the people of rice-consuming countries in Asia and other rice-growing areas of the world, though improvement in the quality and quantity of rice; that the status of IRRI as an international organization, as well as its charter, was recognized in the Agreement Recognizing the International Legal Personality of the International Rice Research Institute (1995 Agreement) signed by the authorized representatives of 19 states on 19 May 1995 and opened for signature at Manila, Philippines to other states and eligible international organizations for a period of one (1) year from the said date and now open to accession by any state or eligible international organization; that the Republic of the Philippines has ratified the 1995 Agreement on 28 July 2005; that a Headquarters Agreement was entered into between the Republic of the Philippines and the IRRI on 24 April 2006 which was ratified by the Senate on 28 April 2008 and entered into force on 14 May 2008. ACTISE In reply, please be informed that Section 106 (A) (2) (c) of the National Internal Revenue Code (NIRC) of 1997, as amended, provides, viz. : "SEC. 106. Value-added Tax on Sale of Goods or Properties. (A) Rate and Base Tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) 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: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve-percent (12%), . . ." However, Section 109 (K) of the same NIRC provides, viz. : "SEC. 109. Exempt Transactions. (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from 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 relation thereto, we look into the "Headquarters Agreement Between the Government of the Republic of the Philippines and the International Rice Research Institute" ("Headquarters Agreement") signed by the Secretary of Foreign Affairs Alberto G. Romulo, for the Republic of the Philippines and Dr. Robert S. Zeigler, Director-General of IRRI on 24 April 2006, concurred in by the Philippine Senate in a resolution 1 adopted on 28 April 2008 and which entered into force on 14 May 2008. Its Article IV, paragraph 5, Section 4.5.1 provides: ARTICLE IV IMMUNITIES AND PRIVILEGES 5. Taxation, Customs and Quarantine Section 4.5.1. The provisions of existing laws or ordinances to the contrary notwithstanding, the Institute , or its successors, shall be exempt from the payment of all taxes provided under existing laws or ordinances. This exemption shall extend to goods imported and owned by the Institute which are intended for its official use. (emphasis supplied) Based on the above, IRRI is exempt from the payment of all taxes . As to the scope of the term 'all taxes', it may be argued that in Commissioner of Internal Revenue vs. Philippine Long Distance Telephone Company, G.R. No. 140230 15 December 2005 (CIR vs. PLDT) , the Supreme Court declared that the correct lesson from the case of Maceda vs. Macaraig, Jr., 2 is that ". . . an exemption from 'all taxes' excludes indirect taxes, unless the exempting statute, like NPC's charter, is so couched as to include indirect tax from exemption". Hence, it would appear that the exemption accorded to IRRI under the Headquarters Agreement covers only direct taxes, VAT not included being an indirect tax. EDACSa However, Section 5 of Revenue Regulations (RR) No. 4-2007, amending Section 4.106-5 of RR No. 16-2005 provides: Section 5. Zero-Rated Sales. Sec. 4.106-5 of RR No. 16-2005 is hereby amended to read as follows: "SEC. 4.106-5. Zero-Rated Sales of Goods or Properties. . . . . The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (c) Sales to Persons or Entities Deemed Tax-exempt Under Special Law or International Agreement. Sale of goods or property to persons or entities who are tax-exempt under special laws or international agreements to which the Philippines is a signatory, such as, Asian Development Bank (ADB), International Rice Research Institute (IRRI) , etc., shall be effectively subject to VAT at zero-rate." (emphasis supplied) The above revenue regulations specifically recognizes IRRI as a tax-exempt entity under an international agreement and specifically subjects the sale of goods or property to it as effectively subject to VAT at zero-rate, clearly showing that the IRRI is considered as falling under the exception contemplated under the principle enunciated in CIR vs. PLDT, ". . . unless the exempting statute . . . is so couched as to include indirect tax from exemption" . As to the ad valorem tax, Section 5 of RR 003-08 3 specifically mentions IRRI as an international organization exempt from excise tax (i.e., ad valorem) . It provides: "SECTION 5. Exemption from the Imposition of Excise Tax Upon Removal. In case of sale/delivery to embassies, legates such as the Office of the Papal Nuncio, or international organizations ( i.e. , Asian Development Bank, International Rice Research Institute, United Nations' various international organizations such as World Health Organization, UNICEF, etc.), the excisable articles may be removed from the place of production of the manufacturer without payment of the excise tax, subject to the following conditions: . . ." (emphasis supplied) From the above revenue regulations likewise, it is implicit that IRRI is recognized as an entity exempt from excise tax and hence cannot be made to shoulder the ad valorem tax paid by the dealer/manufacturer upon removal of the excisable goods from place of production, in this case motor vehicles. In view of all of the foregoing, this Office is of the opinion and so holds that the aforementioned tax-free purchase of the twenty-one (21) units of motor vehicle described above, for the official use of the IRRI, is confirmed to be a valid tax-free purchase pursuant to Section 109 (K) of the NIRC of 1997, as amended and the Headquarters Agreement Between the Government of the Republic of the Philippines and the International Rice Research Institute. The VAT exemption on the subject purchase is interpreted to mean that the direct sale of goods and services to IRRI is effectively zero-rated as confirmed under Section 5 of RR No. 4-2007. It is hereby understood that this exemption applies only to vehicles purchased under the name of the International Rice Research Institute and for its official use. 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. ESTCHa Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Commissioner of Internal Revenue Footnotes 1. Resolution No. 64 adopted by the Senate on 28 April 2008. 2. Ernesto M. Maceda vs. Hon. Catalino Macaraig, Jr., in his capacity as Executive Secretary, Office of the President, Hon. Vicente Jayme, etc., et al., G.R. No. 88291, 08 June 1993. 3. Entitled "Amending Certain Provisions of Existing Regulations on the Granting of Outright Excise Tax Exemption on Removal of Excisable Articles Intended for Export or Sale/Delivery to International Carriers or to Tax-Exempt Entities/Agencies and Prescribing the Provisions for Availing Claims for Product Replenishment" dated 22 January 2008.