ITAD BIR Ruling No. 049-14

May 2, 2014 ITAD BIR RULING NO. 049-14 Sections 106 (A) (2) (c) & 109 (K) - 1997 NIRC, as amended; RR No. 25-03; Sections 11 & 12, Article IV - Host Agreement between the Philippines and WHO; BIR Ruling No. ITAD-099-12 Asian Development Bank 6 ADB Avenue, Mandaluyong City Attention: Mr. Alexander Tarnoff Unit Head, Logistic Management Gentlemen : This refers to your October 31, 2013 letter referred to this Office by the Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting exemption from value-added tax (VAT) on the purchase of a second-hand, previously tax-exempt motor vehicle for personal use of Mr. Hongyi Xu , Technical Officer, Health Systems and Research of the Organization of World Health Organization ("WHO") from Mr. Cheolghee M. Kim , Principal Evaluation Specialist of the Asian Development Bank ("ADB"), specifically described as follows: Make Model Chassis Number Engine Number Plate Year Number Toyota Fortuner 4x4 2006 MR0YZ59G500038377 1KD-9664703 24912 Documents show that a deed of sale over the above-described motor vehicle was executed by and between Mr. Cheolghee M. Kim, as Seller, and Mr. Hongyi Xu, as Buyer, on July 4, 2013 in Manila for personal use of the latter; and that the ADB now requests necessary assistance and support from the DOF to facilitate the transfer of registration of the subject vehicle under the buyer's name. In reply, please be informed that the sale of goods in the Philippines is subject to VAT pursuant to Section 106 (A) of the amended 1997 National Internal Revenue Code ("NIRC"), as amended, thus: "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%) 1 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 transferors: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, 1 raise the rate of value-added tax to twelve percent (12%), . . ." cAEaSC However, under Section 106 (A) (2) (c) and 109 (1) (K) of the NIRC, certain transactions are subject to value-added tax ("VAT") at zero percent rate or exempt from VAT 2 (where in either case no output VAT is shifted or passed-on to the buyer, transferee or lessee of the goods, properties or services) if they are treated as such under special laws or international agreements to which the Philippines is a signatory, thus: "SEC. 106. Value-Added Tax on Sale of Goods or Properties. (A) . . . (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." "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." With respect to an international agreement, there is the Host Agreement between the Republic of the Philippines and the World Health Organization. 3 Sections 11 and 12, Article IV thereof provide: "Article IV PROPERTY, FUNDS AND ASSETS xxx xxx xxx Section 11 The Organization, its assets, income and other property shall be: (a) exempt from all direct and indirect taxes. It is understood, however, that the Organization will not claim exemption from taxes which are, in fact, no more than charges for public utility services; (b) exempt from customs duties, prohibitions and restrictions on imports and exports in respect of medical supplies, or any other goods or articles imported or exported by the Organization for its official use. It is understood, however, that such medical supplies, goods or articles, imported under such exemption will not be sold in the Republic of the Philippines except under conditions agreed with the Government of the Republic of the Philippines; (c) exempt from customs duties, prohibitions and restrictions on imports and exports in respect of their publications. HATICc Section 12 While the Organization will not, as a general rule, in the case of minor purchases, claim exemption from excise duties, and from taxes on the movable and immovable property which form part of the price to be paid, nevertheless when the Organization is making important purchases for official use of properly on which such duties and taxes have been charged or are chargeable, the Government of the Republic of the Philippines shall make appropriate administrative arrangements for the remission or return of the amount of duty or tax. (Emphasis ours) Under Sections 11 and 12 above, while WHO, as an organization is exempt from VAT, such exemption applies only to vehicles purchased under the name of WHO for its official use. Thus, sale by a privileged seller, Mr. Cheolghee M. Kim, Principal Evaluation Specialist of the Asian Development Bank, to Mr. Hongyi Xu, Technical Officer, Health Systems and Research of the Organization of the World Health Organization, being non-privileged buyer, is subject to VAT pursuant to Section 106 of the NIRC. Accordingly, since VAT is an indirect tax, this tax may be shifted or passed-on to Mr. Hongyi Xu as buyer of the subject motor vehicle from a privileged seller. (VAT Ruling No. 143-90 dated May 23, 1990; VAT Ruling No. 041-98 dated November 11, 1998) Moreover, said transfer of motor vehicle is subject to excise tax under Section 149 of the NIRC, as implemented by Section 8 of Revenue Regulations No. ("RR") 25-03, which provides, viz. : "CHAPTER II Coverage, Bases and Rates of Tax xxx xxx xxx SEC. 8. Tax Treatment on Subsequent Sale, Transfer or Exchange of Tax-Exempt Automobile by A Tax-Exempt Person/Entity to A Non-Exempt Person/Entity. In cases where a tax-exempt person/entity acquired an automobile, whether locally purchased or imported, without payment of the tax by reason of his/their exemption, the purchase thereof by a non-exempt person/entity shall be subjected to the ad valorem tax based on the higher of (i) actual consideration between the tax-exempt person/entity and the non-exempt person/entity; or (ii) the depreciated value of the automobile at the time of sale, transfer, or exchange which depreciated rate shall be ten percent (10%) per year, but in no case shall the total amount of depreciation be more than fifty percent (50%) of the original cost or value. However, in case where the automobile was acquired by the tax-exempt person or entity prior to but sold after the effectivity of the Act, 4 the computation of the ad valorem tax shall be governed by the Act. TCHEDA Where a tax-exempt automobile subsequently sold, transferred or exchanged by a tax-exempt person or entity was determined to be originally acquired by such person or entity primarily for the purpose of avoiding the payment of the excise tax, the ad valorem tax shall be computed based on the original purchase price or value of importation of such motor vehicle at the time of its original purchase or importation by such tax-exempt person or entity without the benefit of any deduction for depreciation otherwise allowed under existing rules and regulations." Based on the foregoing, transfers made by tax-exempt person/entity of automobile to person/entity not enjoying indirect tax exemption shall be subject to excise tax in the hands of the latter and the said non-exempt transferee shall be liable for the unpaid excise tax on such automobile based on its depreciated value. In sum, and as it has been consistently ruled by this Office on several occasions involving similar case that the transferee not enjoying indirect tax exemption shall pay the unpaid taxes on the good/s received from an exempt transferor, this Office is of the opinion and so holds that the herein sale of a 2006 Toyota Fortuner by Mr. Cheolghee M. Kim, Principal Evaluation Specialist of the Asian Development Bank to Mr. Hongyi Xu, Technical Officer, Health Systems and Research of the Organization of the World Health Organization, for the latter's personal use, is subject to VAT and excise tax. Mr. Hongyi Xu, the non-exempt transferee of the subject motor vehicle shall be considered the purchaser thereof who shall then be liable for the unpaid VAT and excise tax pursuant to Sections 11 and 12, Article VI of the Host Agreement in relation to Sections 106 (2) (c) and 109 (K) of the NIRC, and Sections 3 and 8 of RR No. 25-03. (BIR Ruling No. ITAD-099-12 dated February 20, 2012) Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. The VAT rate was increased to 12 percent on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006. 2. Revenue Regulations No. 16-2005 (Consolidated Value-Added Tax Regulations of 2005), as amended, provides: "SEC. 4.106-5. Zero-Rated Sales of Goods or Properties. A zero-rated sale of goods or properties (by a VAT-registered person) is a 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." "SEC. 4.108-5. Zero-Rated Sale of Services. (a) In general. A zero-rated sale of service (by a VAT-registered person) is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods or properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with these Regulations." "SEC. 4.109-1. VAT-Exempt Transactions. (A) In general. VAT-exempt transactions refer to the sale of goods or properties and/or services and the use or lease of properties that is not subject to VAT (output tax) and the seller is not allowed any tax credit of VAT (input tax) on purchases. The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT." 3. Approved by the World Health Assembly on May 21, 1952 and by the Government of the Philippines on August 22, 1952. The Agreement entered into force on September 29, 1952. 4. Republic Act No. 9224, An Act Rationalizing the Excise Tax on Automobiles, amending the provisions of Section 149 of the National Internal Revenue Code of 1997.