ITAD BIR Ruling No. 027-11

January 27, 2011 ITAD BIR RULING NO. 027-11 Articles 3 (Definitions), 7 (Project Supplies and Professional and Technical Material and Services) and 14 (Taxes on Income) Philippines-Australia Agreement on Development Cooperation Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Gentlemen : This refers to your letter dated June 6, 2007 requesting confirmation that Land Equity International Pty. Ltd. ("Land Equity") is exempt from income tax and from value-added tax pursuant to the General Agreement on Development Cooperation between the Government of the Republic of the Philippines and the Government of Australia ("Philippines-Australia Agreement on Development Cooperation"). acHDTE Basic Facts It is represented that Land Equity is a corporation organized and existing under the laws of Australia, situated at Suite 9, 74 Kembla Street, Wolllongong, New South Wales 2500, Australia; that based on its License to Transact Business in the Philippines issued by the Securities and Exchange Commission ("SEC") on April 4, 2007, Land Equity is duly licensed to establish a representative office in the Philippines to perform liaison/coordination work exclusively in connection with the implementation of the Contract for Land Administration and Management Project Two ("LAMP II") executed on February 9, 2006, between the Commonwealth of Australia (represented by the Australian Agency for International Development) and Land Equity International Pty. Ltd. (which was executed in pursuance of the Subsidiary Agreement entered into on March 15, 2006, between the Government of the Republic of the Philippines and the Government of Australia, which in turn was concluded pursuant to, and subject to, the provisions of the General Agreement on Development Cooperation entered between the Government of the Republic of the Philippines and the Government of Australia on October 28, 1994); that Land Equity is registered with the SEC under Company Registration No. FS200705485, and its representative office is situated at the 3rd Floor, Secal Building, Department of Environment and Natural Resources, Visayas Avenue, Quezon City, Philippines. The Philippines-Australia Agreement on Development Cooperation It is further represented that the Philippines-Australia Agreement on Development Cooperation was signed on October 28, 1994, and was ratified by the Philippine Senate on January 22, 1996, through the adoption of Resolution No. 18; that under the Agreement, the Philippines and Australia will promote the following forms of assistance: a) The sending of missions by Australia to the Philippines to study and analyze opportunities for Australian assistance; b) The grant of scholarships by Australia to nationals of the Philippines for study and professional training in Australia, the Philippines, or a third country; c) The assignment of Australian experts, advisers and other specialists to the Philippines; d) The provision of equipment, materials, goods, and services by Australia to the Philippines for the successful execution of development projects in the Philippines; e) The development and the carrying out of collaborative research, studies and projects by the Philippines and Australia to contribute to the attainment of the objectives of the Agreement; f) The encouragement and promotion of relations between Philippine and Australian firms, institutions, and persons; g) The promotion of sound development of trade and industry between the Philippines and Australia; and h) Any other forms of assistance considered as official development assistance ("ODA") under the guidelines of the Development Assistance Committee of the Organisation for Economic Cooperation and Development ("OECD") as determined by the Philippines and Australia. CHDTIS It is further represented that the governmental authorities responsible for the implementation of the Philippines-Australia Agreement on Development Cooperation are the National Economic and Development Authority ("NEDA") for the Philippines and the Australian International Development Bureau of the Department of Foreign Affairs for Australia; that the governments of the Philippines and Australia, their respective agencies, statutory authorities, and organizations, may conclude subsidiary arrangements for specific activities that will be carried out under the Agreement; and that these arrangements will make specific reference to and will be covered by the terms of the Agreement. The Subsidiary Arrangement Relating to the Second Phase of the Land Administration and Management Project It is further represented that on March 15, 2006, the Department of Environment and Natural Resources ("DENR") and the Department of Finance ("DOF") of the Philippines and the Australian Agency for International Development ("AusAID") of the Department of Foreign Affairs and Trade of Australia entered into a Subsidiary Arrangement Relating to the Second Phase of the Land Administration and Management Project ("LAMP II") ; that the Subsidiary Arrangement for LAMP II was concluded pursuant to and will be subject to the Philippines-Australia Agreement on Development Cooperation; that under the Subsidiary Arrangement, the LAMP II Project will lay down the foundation for the improvement of interagency collaboration in the delivery of integrated land administration services which supports security of tenure and property valuation, and will be implemented by the DENR and the DOF under a co-financing arrangement with the World Bank; that AusAID will engage the services of a qualified managing contractor to carry out the management and administration of the LAMP II Project, who may subcontract the delivery of mutually arranged program activities under the Subsidiary Arrangement; that Australia's maximum contribution to the LAMP II Project is 34,000,000.00 Australian dollars subject to the normal annual approval by the Australian parliament and that the project will be implemented for five years. It is further represented that the LAMP II Project is an extension of the LAMP I Project, which began in January 2001 and completed in December 2004; that the LAMP I Project was established to test alternative approaches in accelerated land titling and to build a sound policy and institutional foundation for the implementation of a long-term land administration and management program in the Philippines; that the Philippine government wants to extend the learning experiences of the LAMP I Project to other provinces and municipalities throughout the Philippines to support the government's long-term (15-20 year) land administration and management ("LAM") program goal to reduce poverty and enhance economic growth in the Philippines by improving the security of land tenure in the urban and rural areas in the country; that to keep this goal, but within the context of the requirements for the next phase of the LAM program (2005-2010), the goal of the LAMP II Project will be to reform the land administration system in the Philippines to contribute to the socio-economic development goals of the Philippines, and the purpose of the LAMP II Project will be to accelerate the process of land administration reform and to apply the lessons of the LAMP I Project in selected regions, provinces and municipalities of the Philippines to support the progressive expansion of security of tenure and to adopt approved valuation standards and procedures through sustainable partnership arrangements; that the LAMP II Project is divided into five components: Component 1: Policy Development. Objective : To pursue and develop policy, legislative, and regulatory changes in support of reforms in LAM. Component 2: Institutional Development and Capacity. Objective : To develop transparent, responsive and more service oriented institutional arrangements for land administration and to develop the institutional capacity to (i) implement and manage the LAMP II Project at the national, regional, provincial and municipal levels and (ii) lay down the foundation through education and training for future expansion of activities on security of tenure and property valuation. Component 3: Security of Tenure. Objective : To increase the level of security of tenure in the urban and rural areas of selected provinces through an accelerated land adjudication program and the establishment of an efficient and accessible land registration system where rights are unambiguously recognized, adequately demarcated, and securely recorded. Component 4: Property Valuation. Objective : To improve the quality of government and private sector property appraisal performance through the establishment of a single valuation base for taxation. Component 5: Project Management. Objective : To establish the organization and management framework system and plan for the efficient and effective management of the LAMP II Project. The Contract for Land Administration and Management Project Phase Two It is further represented that on February 9, 2006, AusAID entered into a Contract for Land Administration and Management Project Phase Two (LAMP II) with Land Equity where the latter was appointed to be the qualified managing contractor to carry out the management and administration of the LAMP II Project; that Land Equity will provide services to the project beginning February 2006 until its completion in January 2011, and which may be extended for another two years at the option of AusAID; that Land Equity will provide expertise on technical matters, facilitate the process of reform, assist to improve the capacities of partner stakeholders, and provide overall support to the partner agencies of the Philippine government in implementing the project; that Land Equity , in close coordination and consultation with the Project Coordination Offices of the DENR and the DOF, will work collaboratively with the relevant agencies of the Philippine government, the relevant local governments, the civil society, the private sector representatives, and the other stakeholders to support the achievement of the objectives of the project; that Land Equity will promote and uphold the underlying principles of the Project Design Document of the project and to ensure that all annual plans and work plans are developed in full cooperation with their relevant counterparts; that in managing the project, Land Equity will provide the required personnel and will select and engage sub-contract personnel in accordance with the Commonwealth Procurement Guidelines and the eligibility criteria of AusAID for development projects in the Philippines; that the following constitutes the Core Project Team 1. Project Director; SCaIcA 2. Team Leader; 3. LAM Policy Adviser; 4. Human Resources Management and Development Adviser; 5. LAM Education and Training Coordination Adviser; 6. Systematic Adjudication Adviser; 7. Valuation Adviser; 8. Social Development and Gender Adviser; 9. Planning, Monitoring and Evaluation Adviser; and 10. Quality Assurance Panel 1 (Team Leader). Ruling In reply, please be informed that as regards the taxation of Land Equity and its personnel, Articles 7 and 14 of the Philippines-Australia Agreement on Development Cooperation provide "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; xxx xxx xxx" "Article 14 Taxes on income The Government of the Republic of the Philippines shall exempt Australian personnel and Australian firms, institutions and organizations from income taxes or other similar taxes on income or profits, salaries, wages and other remuneration paid for by the Government of Australia and derived from work performed under this Agreement in the Philippines. Furthermore, Australian personnel and Australian firms, institutions and organizations shall be exempt from these taxes on income derived from work performed outside the Philippines which income is not transferred into the Philippines." With respect to Land Equity , inasmuch as it was appointed to be the qualified managing contractor to carry out the management and administration of the LAMP II Project in the Philippines, Land Equity is considered an Australian firm, institution, or organization , and the personnel it directly hired falling under the definition of Article 3 (b) of the Agreement excluding its subcontractors and the latter's staff and employees are also considered Australian personnel pursuant to Article 3 of the Agreement, thus: "Article 3 Definitions In this Agreement: (a) 'Australian institutions, firms and organizations' means Australian institutions, firms or organizations engaged in a development activity under this Agreement; (b) 'Australian personnel' means Australian nationals or permanent residents or other persons who are not nationals or permanent residents of the Philippines who are working in the Philippines on an activity under this Agreement and whose salaries or other costs are funded from the contribution of the Government of Australia to the activity; ESCacI xxx xxx xxx" As to income tax , Article 14 of the Agreement provides that Land Equity and its personnel in the Philippines shall be exempt from income tax or other similar tax on income or profits on salaries, wages and other remuneration paid by the Australian government for works performed in the Philippines and outside the Philippines pursuant to the Agreement. On the other hand, as to value-added tax ("VAT") , Article 7 of the Agreement provides that goods and services directly procured by Land Equity from VAT-registered taxpayers pursuant to the Agreement shall be subject to VAT at the rate of zero percent , while goods directly imported by Land Equity pursuant to the Agreement shall be exempt from VAT. However, this tax treatment does not apply to goods and services procured by the subcontractors of Land Equity. 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue