ITAD BIR Ruling No. 033-16

March 21, 2016 ITAD BIR RULING NO. 033-16 Philippines-Australia General Agreement on Development Cooperation Embassy of Australia Level 23-Tower 2 RCBC Plaza 6819 Ayala Avenue, Makati City, 1200 Attention: Mark Pruden Business Unit Manager Cardno Emerging Markets Gentlemen : This refers to your letter dated October 16, 2014 1 requesting confirmation that purchases of program supplies, professional and technical materials and services made by Cardno Emerging Markets (Australia) Pty. Ltd. (Cardno) pursuant to the Subsidiary Arrangement between the Government of the Philippines (GPH) and the Government of Australia (GOA) for the implementation of the Basic Education Assistance for Muslim Mindanao (BEAM ARMM) Program are subject to exemption/zero percent value-added tax ("VAT") pursuant to the Philippines-Australia General Agreement on Development Cooperation ("GADC") . It is represented that the GPH 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 GPH 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 GPH through the Department of Education (DepEd) and the GOA through the Australian Agency for International Development (AusAID) signed on the 20th of November 2012 a subsidiary arrangement relating to the BEAM ARMM Program; that BEAM ARMM will be implemented over 72 months; that the subsidiary arrangement covers an initial period of the activity of 36 months and may be extended subject to review in accordance with a mechanism approved by both GOA and GPH and subject to normal Australian annual parliamentary approval of budget appropriations; that the goal of BEAM ARMM is to contribute to improving basic education learning outcomes on basic education for the most disadvantaged population in the Autonomous Region of Muslim Mindanao (ARMM); that specifically, the objectives of BEAM ARMM are: a) increase access, participation and completion rates in basic education; b) improve learning achievement in functional literacy and numeracy in elementary education and in the quality of teaching in English, Mathematics and Science; c) develop employment related skills for senior levels of secondary school and for the out-of-school youth; and d) improve management systems within DepEd ARMM. It is also represented that the BEAM ARMM program design is composed of the following components that are linked as integral parts of the program: a) Early childhood and Basic Education; b) School Health; c) Technical Vocational Training and Skills Development for the out-of-school youth (OSY); and d) Alternative Delivery Model of education for children in remote communities. It is also represented that GOA will provide project vehicles, office equipment and commodities to support the functioning of BEAM ARMM in the target areas in ARMM; that the supplies, equipment and motor vehicles provided for the use of the BEAM ARMM by the GOA will be available for BEAM ARMM use only and will not be withdrawn from such use without the consent of the GOA; that motor vehicles provided by the GOA for the BEAM ARMM's use will be registered and insured in the name of the Australian Embassy, representing AusAID and BEAM ARMM; that at the end of the BEAM ARMM's life span, all motor vehicles in accordance with the requirements of the Australian Development Cooperation Program to the Philippines; On the other hand, in respect of supplies, equipment and motor vehicles and professional and technical material and services required by BEAM ARMM whether imported or procured within the Philippines, the GPH will: ATICcS a) coordinate with concerned agencies in the exemption from 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 levels, fees and charges levied in the Philippines; and b) facilitate the expeditious clearance and release of imported supplies and motor vehicles including the provision of appropriate customs and wharfage facilities. It is represented that GOA will provide a grant of A$85M for BEAM ARMM program over 36 months commencing on October 2012; that AusAID will engage a suitably qualified Managing Contractor (MC) to carry out management and administration of the BEAM ARMM program; that on 3 October 2012, GOA, as represented by AusAID contracted the services of Cardno as the MC for the BEAM ARMM Program; that Cardno is a professional infrastructure and environmental services company, with expertise in the development and improvement of physical and social infrastructure for communities around the world; that as the MC for BEAM ARMM, Cardno will be responsible for the implementation management of two (2) of the four (4) total Program components, as follows: a) Component 1.b: Basic Education Improvement . This component will: (i) improve school infrastructure (ii) strengthen DepEd management systems and improve its capacity for policy analysis and planning; (iii) build the management capacity of DepEd-ARMM at regional, provincial, district and school levels; (iii) n enhance teaching and learning processes by training teachers and providing quality materials; (iv) expand assistance to Madaris; and (v) addressing the needs of at-risk of dropping out and marginalized children such as IPs. This component will also provide school/community education grants as an incentive for achieving targeted results. The target deliverable outputs are identified in the BEAM-ARMM design document; and b) Component 3: Technical Vocational Training and Skills Development for OSY . To address the urgent need of students who have dropped-out of school, short courses will be offered though government Technical Vocational training centers or Service Providers. This will provide OSY with opportunities to earn skills that will improve their chance of securing employment or engaging in entrepreneurial activities. The project will also develop post training support to the graduates, which may include referral to micro-credit facilities, or marketing support. The target deliverable outputs are identified in the BEAM ARMM design document. Based on the above representation, you now seek confirmation of the zero percent and exemption on VAT on purchases of goods and services by Cardno for the implementation of BEAM ARMM provided under Article 7 of the GADC. In reply, please be informed that Section 105 of the National Internal Revenue Code of 1997, as amended ("Tax Code") provides: "SEC. 105. Persons Liable. Any person who, in the course of trade or business, sells barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. . . ." 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. : TIADCc 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. . . In relation to the foregoing, paragraph 1 (a), Article 7 of the GADC 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;" (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." AIDSTE 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 GPH and GOA may conclude subsidiary arrangements in respect of specific activities. It provides: "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 the Philippines for the implementation of an activity funded by GOA in relation to the GADC shall be subject to zero percent VAT while project supplies imported outside the Philippines shall be exempted from VAT. Whereas, 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, as defined above, 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 GPH and GOA in respect of specific activities. Accordingly, since Cardno , an Australian firm, was subcontracted by GOA through AusAID to implement BEAM ARMM, a program created and funded by GOA by virtue of the subsidiary arrangement between GOA and GPH pursuant to the GADC, this Office is of the opinion and so holds that the direct purchases of goods and services from individuals or general partnerships registered in the Philippines by Cardno , are subject to zero percent (0%) VAT while the direct importation of project supplies, professional and technical materials by Cardno is exempted from VAT pursuant to paragraph 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Received by this Office on 08 April 2015. n Note from the Publisher: Copied verbatim from the official document.