Cardno Emerging Markets (Australia) Pty. Ltd.

February 7, 2020 ITAD BIR RULING NO. 019-20 Articles 3 (Definitions) and 7 (Project Supplies and Professional and Technical Material and Services) Philippines- Australia Agreement on Development Cooperation Cardno Emerging Markets (Australia) Pty. Ltd.- Regional Operating Headquarters Philippines Level 3B, 111 Paseo de Roxas Building Paseo de Roxas corner Legaspi Street Legaspi Village 1229 Makati City Attention: AAA ______________ Gentlemen : This refers to your letter dated October 5, 2016 requesting for a clarification on the expanded value-added tax (" VAT ") exemption rulings issued to the Philippines-Australia Basic Education Sector Transformation (" BEST ") Program and the Philippines-Australia Basic Education for Muslim Mindanao (" BEAM-ARMM ") Program , which are both funded by the Australian government under the General Agreement on Development Cooperation between the Government of the Republic of the Philippines and the Government of Australia (" GADC "). HTcADC In BIR Ruling Nos. 95-16 dated May 16, 2016 and 33-16 dated March 21, 2016, this Bureau held, among others, that services furnished under the BEST Program and the BEAM ARMM Program are subject to zero percent VAT only when rendered by individuals or general partnerships registered in the Philippines. The basis of our ruling is the definition of " services " in subparagraph (f), Article 3 (Definitions) of the GADC which limits the scope of services to those rendered by individuals and general partnerships registered in the Philippines, to wit: "(f) 'Services' means services performed by individuals or by general partnerships registered in the Philippines." Therefore, in interpreting the VAT zero rating provision in paragraph 1 (a), Article 7 (Project Supplies and Professional and Technical Material and Services) of the GADC below, this Bureau would limit this incentive to services performed by individuals or by general partnerships registered in the Philippines, thus: "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;" (Emphasis ours) However, you are concerned that majority of the service providers engaged by your company, Cardno Emerging Markets (Australia) Pty. Ltd.-Regional Operating Headquarters Philippines (" Cardno ROHQ "), are corporations that legally do not fall under the category of individuals or general partnerships. You also argued that a number of these corporations have declined to honor the rulings because of this limitation, and these result to both programs continuing to pay VAT on locally procured goods and services. You presume that the term general partnership as used in the GADC may have been used in Australian context and may actually include ordinary corporations in the Philippine setting. In reply, please be informed that we reiterate our position in our rulings that locally procured services entitled to VAT zero rating are only those from VAT-registered taxpayers who are either individuals or general partnerships, as defined under Philippine law . Your presumption that the term general partnership may actually include ordinary corporations in the Philippine setting has no factual basis considering that there is nothing in the GADC that reflects this intention. Should the Philippine and Australian governments, at the time of negotiation of the agreement, had intended to extend the benefit of VAT zero rating to other entities like ordinary corporations, they should have expressly incorporated it in the GADC, considering that VAT and the mechanism for VAT zero rating had been existent prior to the signature of the GADC on October 28, 1994. CAIHTE This limitation is evident not only seen in terms of locally procured services for Australian funded projects, but even in the importation of professional and technical material, where only those imported by Australian personnel or Australian institutions, firms and organizations are exempt from customs duties, VAT and other taxes under paragraph 1 (a), Article 7, in relation to subparagraph (d), Article 3, of the GADC, to wit: "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; " (Emphasis ours) " (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; " (Emphasis ours) It is a well settled rule in jurisprudence that tax exemptions are strictly construed against the taxpayer and in favor of the government, as emphasized in Mactan Cebu International Airport Authority vs. Hon. Ferdinand J. Marcos , G.R. No. 120082 dated September 11, 1996 , where the Supreme Court ruled: " . . . But since taxes are what we pay for civilized society, or are the lifeblood of the nation, the law frowns against exemptions from taxation and statutes granting tax exemptions are thus construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. A claim of exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken . Elsewise stated, taxation is the rule, exemption therefrom is the exception . . . " (Emphasis ours) This being so, this Bureau reiterates its position that locally procured services by Cardno ROHQ , pursuant to Australian funded projects under the GADC, are entitled to VAT zero rating only if from VAT-registered taxpayers who are individuals or general partnerships as defined under Philippine law. aScITE Finally, to address your concerns, the Australian government may propose to our Department of Foreign Affairs its interest to renegotiate the existing GADC. Please be guided accordingly. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue