ITAD BIR Ruling No. 028-12

February 1, 2012 ITAD BIR RULING NO. 028-12 Articles 5 & 7, GADC between GRP and GOA; Section 106 (A) (2) (c), NIRC of 1997; BIR Ruling No. ITAD-194-11 Embassy of Australia/ Philippine Australia Human Resource and Organisational Development Facility (PAHRODF) 3rd Floor, JMT Building Ortigas Center, Pasig City Gentlemen : This has reference to Note No. 342/11 dated October 6, 2011 referred to this Office by the Department of Finance and the Department of Foreign Affairs, requesting exemption from payment of value-added tax ("VAT") on the local purchase of motor vehicle for the official use of the Embassy of Australia for the Philippine Australia Human Resource and Organisational Development Facility ("PAHRODF") Project, specifically described as follows: EHTISC Make Model Color Chassis Engine Year Number Number 1. Toyota Fortuner 4X2G 2011 Freedom MHFZX69G607029620 2TR7183404 2.7L GAS A/T White 2. Toyota Fortuner 4X2G 2011 Dark Steel MHFZX69G007029709 2TR7184439 2.7L GAS A/T Mica XX XXXXXXXXXXX XXX XXXXXX XXXXXXXXX XXXXXXX In reply, please be informed that Section 106 (A) (2) (c) of the National Internal Revenue Code of 1997, as amended ("NIRC of 1997") provides, viz. : "Section 106. Value-added Tax on Sale of Goods or n 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%),... (2) 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." Relative thereto Article 5, paragraphs 1 & 2 of the General Agreement on Development Cooperation ("GADC") between the Government of the Republic of the Philippines ( "GRP" ) and the Government of Australia ( "GOA") provides, viz. : "Article 5 Subsidiary arrangements 1. In support of the objectives 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. 2. Subsidiary arrangements shall make specific reference to this Agreement and the terms of this Agreement shall, unless otherwise stated, apply to such subsidiary arrangements. Wherever possible, such subsidiary arrangements shall set out: (a) the name and duration of the activity; IacHAE (b) a description of the activity and statement of its objectives; (c) the nominated implementing agencies in both countries; (d) potential benefits of the activity; xxx xxx xxx" In this connection, a Memorandum of Subsidiary Arrangement ("MSA") between the GRP and the GOA relating to PAHRODF was signed on March 27, 2009. Its paragraph 7 (7.2) provides as follows: "Paragraph 7 Facility Supplies, Motor Vehicles and Professional and Technical Material and Services xxx xxx xxx 7.2 In respect of supplies, motor vehicles and professional and technical material and services required by the Project for the conduct of PAHRODF, whether imported into or procured within the Philippines, the Government of the Republic of the Philippines will: (a) coordinate with concerned agencies in the exemption of Expanded Value Added Tax (eVAT) and other duties and taxes imposed in the Philippines, and be responsible for inspection fees, storage charges and all other levies, fees and charges levied in the Philippines. xxx xxx xxx" Based on the abovequoted provisions, the terms of the GADC, unless otherwise stated, shall apply to subsidiary arrangements making specific reference to said Agreement. Moreover, Article 7 (1) (a) and (3) of the GADC states that the GRP shall subject to zero rate, for purposes of VAT, direct supplies of domestic goods and services in respect of project supplies and professional and technical material and services including vehicles. It provides: "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 3. The disposal of vehicle provided for activities executed under the Agreement shall be the subject of discussions between the two Governments and shall take into account the transport requirements of other activities assisted by the Government of Australia under the Program of development cooperation. (Emphasis ours)" TaHDAS Such being the case, this office is of the opinion and so holds that since PAHRODF was created by virtue of a subsidiary arrangement concluded pursuant to the provisions of the GADC, an international agreement to which the Philippines is a signatory, the purchase of two (2) units 2011 Toyota Fortuner 4X2 G 2.7L GAS A/T, for PAHRODF's official use shall be subject to VAT at zero percent rate pursuant to Section 106 (A) (2) (C) of the NIRC of 1997 in relation to Article 5 of the GADC and paragraph 7 (7.2) of the MSA on the creation of PAHRODF. 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 n Note from the Publisher: Written as "of" in the original document.