ITAD BIR Ruling No. 018-17

May 23, 2017 ITAD BIR RULING NO. 018-17 Sections 106 (A) (2) (c), 108 (A), (B) (3) and 109 (1) (K), NIRC of 1997, as amended; Articles 5 and 7, General Agreement on Development Cooperation between the Government of Australia and the Government of the Republic of the Philippines The Australian Embassy Level 23-Tower 2 RCBC Plaza 6819 Ayala Avenue 1200 Gentlemen : This refers to your 05 July 2016 Note No. 263/16 indorsed by the Department of Foreign Affairs (DFA) to this Bureau requesting for value added tax (VAT) ruling on the procurement of goods and/or services relating to the Deployment of a Disaster Response Systems Development Adviser to the Department of Social Welfare and Development ("DSWD") , pursuant to the Subsidiary Arrangement relating to the Adviser and Exchange of Letters between DSWD and the Government of Australia (" GOA "). It is represented that the Government of the Republic of the Philippines (" GPH "), through DSWD, and the GOA, through its Department of Foreign Affairs and Trade (DFAT), signed a General Agreement on Development Cooperation (" GADC "), on 28 October 1994, which came into force 12 March 1998, to strengthen the existing cordial relations between the two governments and to foster development cooperation between the Philippines and Australia; that the GADC was duly ratified by the Philippine Senate pursuant to a Resolution adopted on 22 January 1996; that under Article 5 of the GADC, the GPH and GOA or their agencies, statutory authorities or organizations may conclude subsidiary arrangements in respect of specific activities; that pursuant to the terms of the GADC, on 16 June 2015, GPH and the GOA entered into a Subsidiary Arrangement Relating to the Deployment of a Disaster Response System Development Adviser to the DSWD (" Arrangement "); that DSWD requested the assistance of the GOA to provide an Australian Civilian Corps (" ACC ") specialist to work in line with the DSWD Central Office as the Disaster Response Systems Development Adviser (" Adviser "); and that the Adviser will be required to develop and enhance DSWD's disaster response systems by undertaking necessary activities in partnership with DSWD key officials in key disaster relief (DR) operational areas. Moreover, the Exchange of Letters between the GPH, through DSWD and the GOA dated 16 June 2016, show the agreed amendments to the Arrangement by both Parties, particularly on the extension of the implementation period of the activity from 12 months to 27 months, and the increase in the estimated amount of contributions from AUD___________ to AUD___________, which will cover implementation and monitoring of activity including costs. In reply, please be informed that Section 105 of the National Internal Revenue Code (NIRC) of 1997, as amended, 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, Sections 106 (A) (2) (c) and 108 (B) (3) of the NIRC of 1997, as amended state that certain transactions involving sale of goods or properties or performance of services or use or lease of properties are subject to VAT at zero percent, to wit: " 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 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%). xxx xxx xxx (2) Zero-rated Sales The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: xxx xxx xxx (c) 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. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: 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%), 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" Also, Section 109 (K) of the same 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 relation to the foregoing, paragraph 1 (a), Article 7 of the GADC provides that the Philippine Government shall subject to zero percent VAT, the direct supplies of domestic goods and services and shall exempt direct importation of goods from VAT with respect to projects carried out in the Philippines pursuant to the GADC, to wit: " Article 7 Project Supplies and Professional and Technical Material and Services 1. In respect of project supplies and professional and technical material and services whether to be imported from outside or procured within the Philippines, the Government of the Republic of the Philippines shall: (a) for direct supplies of domestic goods and services, subject them to zero rate for purposes of Value-Added Tax (VAT); exempt direct importation of goods from import duties, VAT and other taxes imposed in the Philippines (or pay such duties thereon); and be responsible for inspection fees, storage charges and all other levies, fees and charges;" (Underscoring supplied) Further, Article 3 (d) of the GADC defines project supplies and professional and technical material and services, as follows: " Article 3 Definitions In this Agreement: xxx xxx xxx d) "Professional and technical material" means equipment and other goods imported by members of the Australian personnel or Australian institutions, firms and organizations for their professional use while engaged in an activity under this Agreement and paid for from funds provided by the Government of Australia; e) "Project supplies" means equipment, material and other goods supplied for the execution of development activities under this Agreement, the cost of which is funded from the contribution of the Government of Australia to the activity." f) "Services" means services performed by individuals or by general partnerships registered in the Philippines; x x x" Moreover, under Article 5 (1) of the GADC, the GPH and GOA may conclude subsidiary arrangements in respect of specific activities. Article 5 (1) of the GADC provides: " Article 5 Subsidiary Arrangements 1. In support of the objective of this agreement, the Government of Australia and the Government of the Republic of the Philippines, or their agencies, statutory authorities or organizations may conclude subsidiary arrangements in respect of specific activities." Based on the foregoing provisions, project supplies procured within the Philippines for the implementation of an activity funded by GOA in relation to the GADC shall be subject to zero percent VAT while project supplies imported outside the Philippines shall be exempted from VAT. Considering that the subject Arrangement was created by virtue of a subsidiary arrangement between GPH and GOA pursuant to Article 5 of the GADC, this Office is of the opinion and so holds that the direct purchase of goods and services relating to the Deployment of a Disaster Response Systems Development Adviser to the DSWD are subject to VAT at the rate of zero percent (0%). In addition, the importation of goods in relation to the aforementioned activity are exempt from VAT pursuant to paragraph 1 (a) Article 7 of the GADC. This ruling is issued on the basis of facts represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein party is concerned. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue