Philippine Business for Social Progress, Inc.

September 6, 2019 BIR ITAD BIR RULING NO. 027-19 Philippines-Australia General Agreement on Development Cooperation Philippine Business for Social Progress, Inc. Philippine Social Development Center Magallanes St. corner Real St. Intramuros, Manila 1002 Attention: AAA __________ Gentlemen : This refers to your letter dated November 13, 2014 requesting confirmation that purchases of program supplies, vehicles, professional and technical materials and services made by the Philippine Business for Social Progress, Inc. (PBSP) pursuant to the Subsidiary Arrangement between the Government of the Philippines (GOP) and the Government of Australia (GOA) for the implementation of the Best Education Sector Transformation (BEST) Program are subject to exemption/zero percent value-added tax (" VAT ") pursuant to the Philippines-Australia General Agreement on Development Cooperation (" GADC "). cSaATC It is represented that the GOP and GOA signed GADC on the 28th of October 1994 in Sydney, Australia, to strengthen the existing cordial relations between the two governments and to foster development cooperation between the Philippines and Australia. Under the GADC ,the GOP and GOA or their agencies, statutory authorities or organizations may conclude subsidiary arrangements in respect of specific activities. It is further represented that pursuant to Art. 5 of the GADC ,the GOP through the Department of Education ( DepEd ) and the GOA through the Department of Foreign Affairs and Trade represented by the Development Cooperation Branch, Australian Embassy in Manila ( Australian Embassy ) signed on the 21st of February 2014 a subsidiary arrangement relating to the BEST Program; that BEST will be implemented until 30 June 2019 and will be covered by the subsidiary arrangement in accordance with the mechanism approved by both GOA and GOP and subject to normal Australian annual parliamentary approval; that the objectives of BEST are: to contribute to improve quality of learning outcomes; to have more equitable access of boys and girls to education; and to improve service delivery through better governance; that the total GOA contributions are estimated to be up to A$150,000,000.00; and that GOA contributions will cover implementation, management, monitoring and evaluation of the program and related activities. It is also represented that GOA will provide project vehicles, office equipment and commodities to support the functioning of BEST in the DepEd Central Office and in the target regions; that all motor vehicles provided by GOA for the program's use will be registered and insured in the name of the Australian Embassy and BEST ;that at the end of the program, all motor vehicles and office equipment will be returned to GOA who will reassign the same in accordance with the requirements of the GADC to the Philippines; that on the other hand, the GOP will be responsible in coordinating with the concerned agencies to obtain exemption on value-added tax (VAT) and other duties and taxes imposed in the Philippines and facilitate the expeditious clearance and release of imported supplies and motor vehicles including the provision of appropriate customs and wharfage facilities. It is further represented that the Australian Embassy will engage suitably qualified contractors or organizations to carry out any of its functions under the subsidiary arrangement in close consultation with DepEd ;that consequently, on the 2nd day of August 2013 a Grant Agreement Deed was executed between the Commonwealth of Australia as represented by the Australian Agency for International Development ( AusAid ) and the PBSP for Classroom Construction Support in the Philippines; that PBSP is the Philippines' largest corporate-led foundation dedicated to the promotion of business sector involvement in social development; that PBSP will work with DepEd to identify target schools within Regions 5, 6, 7, 8, 10 and NCR; that PBSP will build classrooms in target recipient 50 schools in Davao Region to support the capacity of DepEd and to respond to the destructive effects of typhoon Pablo; that all in all, the activity will construct 252 classrooms and will provide around 11,340 learning spaces for school children; and that the activity will commence on the day of August 1, 2013 to August 30, 2015 and must be completed on the 30th of August 2015. It is also represented that in the implementation of BEST ,a Program Steering Committee ( PSC ) will be responsible for providing the general directions and setting program policies; that under the guidance of PSC , PBSP will assume overall project management responsibility for the grant: planning, procurement, contracting, performances monitoring, financial management, reporting and stakeholder management at the national level and local levels; that PBSP appreciates the need to have an efficient procurement arrangement while maintaining the integrity of the process; that PBSP intends to do this by a) adhering to the government procurement law, and b) organizing a special Bids and Awards Committee. Based on the above representation, you now seek confirmation of the zero percent and exemption on VAT on the purchases of program supplies, vehicles, professional and technical materials and services by PBSP for the implementation of BEST provided under Section 1, Article 7 of the GADC . In reply, please be informed that Section 114 (C) of the National Internal Revenue Code of 1997, as amended ("Tax Code") provides for the general rule that sale of goods and services to government or any of its agencies are subject to the final withholding VAT of five percent (5%), to wit: cHDAIS " SEC. 114. Return and Payment of Value-Added Tax. xxx xxx xxx (A) Withholding of Value-Added Tax. The government or any of its political subdivisions, instrumentalities or agencies including government-owned or controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and/or of services which are subject to value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold a final value-added tax at the rate of five percent (5%) of the gross payment thereof . . . For purposes of this Section, the payor or person in control of the payment shall be considered as the withholding agent. . ." However, Section 106 (2) (c) of the Tax Code states that certain transactions involving the sale of goods or properties are subject to VAT at zero percent if they are treated as such under special laws or international agreements to which the Philippines is a signatory. Also, Section 109 (1) (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. 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 to zero rate. 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. xxx xxx xxx 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, Art. 3 (d) of the GADC defines project supplies and professional and technical material and services, also the terms Australian personnel and Australian institutions, firms and organizations as follows: " 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; 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; xxx xxx xxx" Moreover, under Article 5 (1) of the GADC ,the GOP and GOA may conclude subsidiary arrangements in respect of specific activities. Art. 5 (1) of the GADC provides: ISHCcT " 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 or imported outside the Philippines for the implementation of an activity funded by GOA in relation to the GADC shall be subject to zero percent VAT while services will be subject to zero percent VAT only when rendered by individuals or general partnerships registered in the Philippines. On the other hand, professional and technical materials will be exempted from VAT only when it is imported by Australian personnel or Australian institutions, firms and organizations for their professional use while engaged in an activity under the GADC and paid for from funds provided by the GOA .These privileges, in turn, extend to subsidiary arrangement which will be concluded between GOP and GOA in respect of specific activities. Accordingly, since PBSP ,a Philippine corporation, was subcontracted by GOA through AusAID by virtue of the subsidiary arrangement, in support of the objectives of BEST and GADC ,this Office is of the opinion and so holds that PBSP's direct domestic purchases of project supplies and services of individuals or general partnerships registered in the Philippines are subject to zero percent (0%) VAT and PBSP's direct importation of project supplies is exempted from VAT while the direct importation of professional and technical materials will be exempted from VAT only when it is imported by an Australian institution, firm, organization or an Australian personnel contemplated under Article 3 (a) and (b) of the GADC pursuant to paragraph 1 (a),Article 7 of the GADC . 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.) CAESAR R. DULAY Commissioner of Internal Revenue