Embassy of the United States of America

March 21, 2018 ITAD BIR RULING NO. 044-18 Sections 106, 108 and 109 of the NIRC, as amended Embassy of the United States of America 1201 Roxas Boulevard 1000 Manila, Philippines Gentlemen : This refers to your letter dated 11 October 2017, indorsed by the Department of Foreign Affairs, requesting the Bureau of Internal Revenue (BIR) to grant Value Added Tax (VAT) exemption on the purchases of goods and services associated with the development assistance activities of the United States of America (US) in the Philippines through JUSMAG-Philippines and Naval Facilities Engineering Command, Pacific (NAVFAC) and their authorized contractor, JJLL LLC-Philippine Representative Office (JJLL LLC-Philippines). HSCATc It is represented that the development assistance is in compliance with the Mutual Defense Treaty between the Republic of the Philippines and the United States of America (PH-US Mutual Defense Treaty) signed on 30 August 1951; that mutual aid and development is specifically mentioned on Article II of said Treaty; that JJLL LLC, a foreign company organized and existing under the laws of State of Texas, U.S.A., was duly licensed by the Securities and Exchange Commission to establish its representative office under the name JJLL LLC-Philippine Representative Office; that Philippines Operations Support Contract (POSC) provides support services in the Republic of the Philippines for US Military Forces such as Special Operations Command, Pacific (SOCPAC), PACOM Augmentation Team-Philippines (PAT-PHL) and US Marine Corps Forces, Pacific, (MARFORPAC) performing a variety of advisory and assistance missions in support of the Armed Forces of the Philippines (AFP); and that JJLL LLC-Philippines will locally source materials/services required for the POSC. In reply, please be informed that Sections 106 and 108 of the National Internal Revenue Code (NIRC) of 1997, as amended state, to wit: "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, value-added tax equivalent to twelve percent (12%) 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. SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to twelve percent (12%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties." In view of the foregoing, 12% VAT of the gross selling price or gross value in money of the goods or properties sold or gross receipts derived from the sale or exchange of services shall be collected and shall be paid by the seller or transferor. The VAT is an indirect tax and it may be passed on to the buyer, transferee or lessee of the goods, properties or services. However, Section 109 of the NIRC, as amended, provides: "SEC. 109. Exempt Transactions. (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax. (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;" Based on the foregoing, transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, shall be exempt from VAT. The PH-US Mutual Defense Treaty and the Economic and Technical Cooperation: Agreement between the United States of America and the Philippines (PH-US Economic and Technical Cooperation) do not contain provisions which can be the basis of the grant of the requested VAT exemption. Article II of the PH-US Mutual Defense Treaty provides: "ARTICLE II. In order more effectively to achieve the objective of this Treaty, the Parties separately and jointly by self-help and mutual aid will maintain and develop their individual and collective capacity to resist armed attack." Meanwhile, Article IV of the PH-US Economic and Technical Cooperation, states to wit: IDTSEH "Article IV Missions 1. The Government of the Philippines agrees to receive a Special Technical and Economic Mission which will discharge the responsibilities of the Government of the United States of America in the Philippines under this agreement and the Government of the Philippines will, upon appropriate notification from the Ambassador of the United States of America in the Philippines, consider this Mission and its personnel as part of the Diplomatic Mission of the United States of America for the purpose of enjoying the privileges and immunities accorded to that Mission and its personnel of comparable rank. Such Mission shall include but not be limited to experts whose services are made available to implement Article II of this agreement." The aforementioned provisions do not provide for explicit grant of VAT exemption but simply direct the Government of the Philippines to consider the Special Technical and Economic Mission (STEM) as part of the Diplomatic Mission of the United States of America for the purpose of enjoying the same privileges and immunities granted to the latter. In this case, JJLL LLC-Philippines is only a representative office of JJLL LLC, a foreign company, and not a STEM. In addition, the letter dated 07 February 2018 giving an overview of POSC, cannot be made the basis for the grant of VAT exemption to JJLL LLC-Philippines. In a long line of decisions, the Supreme Court has time and again upheld the principle that tax exemptions are strictly construed against the claimant. Statutes and international agreements to which the Philippines is a signatory that allow exemptions are construed strictly against the grantee and liberally in favour of the government, since taxes are the lifeblood of the nation. Thus, any exemption from the payment of tax must be clearly stated in the language of the law or international agreement, and it cannot be merely implied therefrom. In view thereof, this Office cannot grant the requested VAT exemption to JJLL LLC-Philippines on its purchases of goods and services associated with the development assistance activities of US in the Philippines for lack of legal basis. Accordingly, all purchases of goods and services by JJLL LLC-Philippines shall be subject to VAT. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue