ITAD BIR Ruling No. 038-10

September 21, 2010 ITAD BIR RULING NO. 038-10 Sec. 106 (A) (2) (c), NIRC of 1997; Charter of the Southeast Asian Ministers of Education Organization adopted at Singapore; Convention on the Privileges and Immunities of the Specialized Agencies of the United Nations; BIR Ruling No. ITAD-10-004 Southeast Asian Regional Center for Graduate Study and Research in Agriculture College, Los Baos, Laguna 4301, Philippines Attention: Gil C. Saguiguit, Jr. Deputy Director-Administration Gentlemen : This refers to your letter dated June 21, 2010 indorsed to this Office by the Department of Finance and the Department of Foreign Affairs, requesting for the exemption from payment of value-added tax (VAT) on locally purchased one (1) unit motor vehicle, for the official use of the Southeast Asian Regional Center for Graduate Study and Research in Agriculture (SEAMEO-SEARCA), specifically described as follows: Make: One (1) Honda Accord 3.5S A/T Model Year: 2010 Color: Crystal Black Engine Number: J35Z23951294 Chassis Number: MRHCP3620AP020062 It is represented that SEARCA, a non-stock and non-profit organization dedicated to provide technical and educational assistance in problems related to agricultural development, was established in 1968 by the Southeast Asian Ministers of Education Council (SEAMEC) in a Letter of Agreement between SEAMEC, the Government of the Philippines and the Government of the United States; that tax exemption privileges were granted by the Philippine Government to SEARCA in Republic Act No. 6450 dated June 17, 1972 and extended under Presidential Decree No. (PD) 1171 dated July 12, 1977, to wit: ". . . (SEARCA) and its grantees, shall be exempt from the payment of gift, franchise, specific, percentage, real property, exchange, import, export, and all other taxes, duties and fees provided under existing laws and ordinances: Provided, That this exemption shall extend to goods imported and owned by SEARCA . . ." In reply, please be informed that Section 106 (A) (2) of the National Internal Revenue Code (NIRC) of 1997, as amended, provides: "Section 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: DEIHAa (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). xxx xxx xxx (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." In relation thereto, Section 1 of PD 1171 provides: "PRESIDENTIAL DECREE NO. 1171 Providing Certain Tax Exemptions to the Southeast Asian Regional Center for Graduate Study and Research in Agriculture and for Other Purposes Section 1. Tax Exemption. The provisions of existing laws or ordinances to the contrary notwithstanding, the Southeast Asian Regional Center for Graduate Study and Research (SEARCA) and its grantees, shall be exempt from the payment of gift, franchise, specific, percentage, real property, exchange, import, export, and all other taxes, duties and fees provided under existing laws and ordinances: Provided, That this exemption shall extend to goods imported and owned by SEARCA to be leased or used by members of its staff and to goods brought in or imported for the personal use of foreign personnel whose services are paid by specific donor entities, agencies, or governments or from funds granted by these donors: Provided, further, That should such goods or articles subsequently be sold, transferred or otherwise disposed of in the Philippines to persons or entities not entitled to tax exemption herein provided, the proper customs duties and taxes under existing laws shall be imposed: Provided, finally, that non-Filipino citizens or non-resident aliens who are in experts in their respective fields and are serving in the staff of the Regional Center shall be exempt from the payment of Philippine income tax on all salaries and stipends, wages or other income derived solely and by reason of service under SEARCA." (Emphasis supplied) Based on the above, SEARCA is clearly exempt from the payment of taxes provided under existing laws. Such exemption, which extends to goods imported and owned by it, was granted in view of the significant functions of SEARCA in expressing the Philippines' commitment to regional cooperation among Southeast Asia and other countries in Asia and elsewhere through education, science and culture. It is in the context of this commitment that the tax exemption privileges accorded to SEARCA, as an entity, is construed as not being limited to taxes for which it is directly liable. However, it may be argued that upon the issuance of Executive Order No. (EO) 93 on December 17, 1986, the tax privileges accorded to SEARCA under the said PD 1171 were in effect, withdrawn, as it provides: ". . . all tax and duty incentives granted to government and private entities are withdrawn except the following: 1. Those covered by the non-impairment clause of the Constitution; 2. Those conferred by effective international agreements to which the Government of the Republic of the Philippines is a signatory; 3. Those enjoyed by enterprises registered with: a. The Board of Investments pursuant to Presidential Decree No. 1789, as amended; b. The Export Processing Zone Authority, pursuant to Presidential Decree No. 66, as amended; c. The Philippine Veterans Investment Development Corporation Industrial Authority pursuant to Presidential Decree No. 538, as amended; 4. Those enjoyed by the copper mining industry pursuant to the provisions of Letter of Instruction No. 1416; 5. Those conferred under the four basic codes namely: a. The Tariff and Customs Code, as amended; IaEScC b. The National Internal Revenue Code, as amended; c. The Local Tax Code, as amended; d. The Real Property Tax Code, as amended; e. Those approved by the President upon the recommendation of the Fiscal Incentives Review Board. xxx xxx xxx (Emphasis supplied)" Based on the aforecited EO 93, exemption privileges granted based on an effective international agreement to which the Government of the Republic of the Philippines is a signatory were not withdrawn. Accordingly, the Agreement between the Government of the Republic of the Philippines and the Southeast Asian Ministers of Education Organization Regarding the Temporary Operation of the SEAMEC Regional Centre for Educational Innovation and Technology (INNOTECH) dated July 16, 1976 may be taken into consideration. Article II of said Agreement provides that: "Article II Legal Status of the Regional Centre 1. The Government recognizes the juridical personality of the Organization, and that the Organization and the Regional Centre, on behalf of and as a subordinate body of the Organization, shall have the capacity: a. To contract; b. To acquire and dispose of movable and immovable property; c. To institute legal proceedings. 2. The Government shall grant the Regional Centre the same privileges and immunities as those accorded international bodies now operating in the Philippines such as SEARCA. " (Emphasis supplied) Moreover, the Charter of the Southeast Asian Ministers of Education Organization adopted at Singapore on February 7, 1968 which was accepted by the President of the Philippines was concurred in by the Senate on August 31, 1972 as evidenced by Senate Resolution No. 56. 1 Article VIII of the said Charter provides that: "Article VIII Legal Status of the Organization 1. The Organization shall possess full juridical personality and, in particular, full capacity: a. To contract; b. To acquire, and dispose of, immovable and movable property; and c. To institute legal proceedings. 2. The Organization shall enjoy in the territory of each of its Member States such privileges and immunities as are necessary for the fulfillment of its purposes. cADSCT xxx xxx xxx (Emphasis supplied)" It is worthy to note that in a letter dated February 22, 1994 by then Secretary of the Department of Justice, Hon. Franklin Drilon, SEARCA was confirmed to be an international organization considering that it was organized pursuant to the SEAMEO charter, indubitably, an international agreement. SEARCA's Enabling Instrument, provides that the said document is the sole source of the authority and rights of the said organization; that SEARCA derives its juridical personality from the SEAMEO charter and possesses "full capacity" to "contract", "acquire, dispose of immovable and movable property", and that it shall be accorded "such privileges and immunities as are normally accorded United Nations institutions". Thus, pursuant to the SEAMEO charter, the provision of Section 10, Article III of the Convention on the Privileges and Immunities of the Specialized Agencies of the United Nations (UN Convention) may apply to SEARCA. It states that: "Article III Property, Funds and Assets xxx xxx xxx Section 10. While the specialized agencies will not, as a general rule, claim exemption from excise duties and from taxes on the sale of movable and immovable property which form part of the price to be paid, nevertheless when the specialized agencies are making important purchases for official use of property on which such duties and taxes have been charged or chargeable, States parties to this Convention will whenever possible, make appropriate administrative arrangements from the remission or return of the amount of duty or tax." The aforecited provision of the UN Convention clearly requires that to be entitled to a possible remission or return of the amount of duty or tax, the subject purchase must be for official use of the specialized agency. But in lieu of remission or return of the amount of duty or tax related to the purchase for official use, a tax exemption privilege is instead granted. 2 In view of all of the foregoing, this Office is of the opinion and hereby holds that the herein purchase by SEARCA of a Honda Accord 3.5S A/T for its official use is subject to VAT at zero percent rate pursuant to Section 106 (A) (2) (c) of the NIRC of 1997, as amended. It is hereby understood that the tax exemption privilege herein accorded applies only to vehicles purchased under the name of SEARCA for its official use. 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. SCHcaT Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Resolution Concurring in the Acceptance of the President of the Philippines on the charter of the Southeast Asian Ministers of Education. 2. BIR Ruling No. ITAD-46-07 dated April 11, 2007 citing VAT Ruling No. 143-90 dated May 23, 1990 which revoked VAT Ruling No. 176-89 dated August 4, 1989.