Maria Edita Z. Tan

March 8, 2018 ITAD BIR RULING NO. 031-18 Sections 106 (A) (2) (c); 107 (A) (B); and 108 (B) (3) of the Tax Code; Sections 4.106-5 (c) and 4.108-5 (b) (3) of RR No. 16-2005; Section 34 (a), Article IX of ADB-Philippine Agreement Maria Edita Z. Tan Assistant Secretary International Finance Group DEPARTMENT OF FINANCE Roxas Blvd. corner Pablo Ocampo, Sr. St. 1004 Manila SUBJECT : Japan Fund for Poverty Reduction (JFPR 9175): Emergency Assistance and Early Recovery for Poor Municipalities Affected by Typhoon Yolanda (GRANT) Dear Assistant Secretary Tan, This refers to your letter dated 31 January 2017 providing pertinent legal bases and other supporting documents, relative to the letter dated 14 September 2016 with regard to the request of Asian Development Bank, as executing agency of the GRANT, for assistance in determining the procedure on the treatment of value-added tax (VAT) on the equipment, materials and supplies procured by the GRANT consulting firms. HTcADC It is represented that the ADB recruited consulting firms, namely: (a) International Federation of the Red Cross and Red Crescent Societies; (b) Plan International; and (c) Comprehensive Environmental Planning, Inc. and Geos, Inc., in association with Alliance for Safe and Sustainable Reconstruction, Inc. (ASSURE), in order to rebuild damaged infrastructure and sources of livelihood brought by the Typhoon Yolanda, and provide access to emergency support and ensure resilience to future disasters; that in order to carry out the assistance, said consulting firms brought into the country several equipment, vehicles, materials and supplies which will be consumed therein, withdrawn therefrom, or become the property of the Philippine Government; that these consulting firms are operating on the understanding that the Philippine Government shall exempt them from any taxes under Philippine laws and regulations, with respect to the items brought into the country. In reply, please be informed that Sections 106 (A) (2) (c), 107 (A) (B) and 108 (B) (3) of the National Internal Revenue Code of 1997, as amended (Tax Code), provide that: "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%), after any of the following conditions has been satisfied: 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." "SEC. 107. Value-Added Tax on Importation of Goods. (A) In General. There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten percent (10%) based on the total value used by the Bureau of Customs in determining tariff and customs duties plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody: Provided, That where the customs duties are determined on the basis of the quantity or volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if any: Provided, further, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of the value-added tax to twelve percent (12%) after any of the following conditions has been satisfied: xxx xxx xxx (B) Transfer of Goods by Tax-exempt Persons. In the case of tax-free importation of goods into the Philippines by persons, entities or agencies exempt from tax where such goods are subsequently sold, transferred or exchanged in the Philippines to non-exempt persons or entities, the purchasers, transferees or recipients shall be considered the importers thereof, who shall be liable for any internal revenue tax on such importation. The tax due on such importation shall constitute a lien on the goods superior to all charges or liens on the goods, irrespective of the possessor thereof." "SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. xxx xxx xxx (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;" Moreover, Sections 4.106-5 (c) and 4.108-5 (b) (3) of Revenue Regulations (RR) No. 16-2005, states that: "SEC. 4.106.5. Z ero-Rated Sales of Goods or Properties. A zero-rated sale of goods or properties (by a VAT-registered person) is taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods, properties or services related to such zero-rated sale, shall be available as tax credit or refund in accordance with these Regulations. The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: xxx xxx xxx (c) Sales to persons or Entities Deemed Tax-exempt under Special Law or International Agreement. Sales of goods or property to persons or entities who are tax-exempt under special laws or international agreements to which the Philippines is signatory, such as, Asian Development Bank (ADB) , International Rice Research Institute (IRRI), etc. shall be effectively subject to VAT at zero-rate ." (Underscoring provided) "SEC. 4.108-5. Zero-rated Sale of Services. (b) Transactions Subject to Zero Percent (0%) VAT Rate. The following services performed in the Philippines by a VAT-registered person shall be subject to zero percent (0%) VAT rate: aScITE xxx xxx xxx (3) Services rendered to persons or entities whose exemption under special laws or international agreement to which the Philippines is a signatory effectively subjects the supply of such services to zero (0%) rate;" In relation thereto, Section 34 (a) of the 22 December 1966 Agreement Between the Asian Development Bank and the Government of the Republic of the Philippines Regarding the Headquarters of the Asian Development Bank (ADB-Philippine Agreement) , provides: " ARTICLE IX Property of the Bank and Taxation Section 34 The Bank, its property and its operations and transactions shall be exempt from: (a) all taxation and any obligation for the payment, withholding or collection of any tax or duty. The Bank will not claim exemption from taxes or charges which are no more than payments for public utility services;" In view of the foregoing, since ADB and its transactions are exempt from tax, the sale of goods and services by VAT-registered persons to ADB, through the GRANT consulting firms, which is directly in connection with the GRANT , shall be subject to VAT at zero percent (0%) rate pursuant to Sections 106 (A) (2) (c) and 108 (B) (3) of the Tax Code, and as implemented by 4.106-5 (c) and 4.108-5 (b) (3) of Revenue Regulations No. 16-2005. It is worthy to mention, however, that the herein grant of exemption covers only purchases in connection with the GRANT and does not give VAT exemption to the consulting firms. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue