United Nations Industrial

November 27, 2020 ITAD BIR RULING NO. 069-20 Sections 106, 108 and 109, NIRC of 1997, as amended; Article IX, Basic Co-operation Agreement United Nations Industrial Development Organization 14th Floor, North Tower, Rockwell Business Center Sheridan corner United Sheridan Streets 1554 Mandaluyong City, Manila Attention: _________________ _________________ Gentlemen : This refers to your letter dated 23 September 2020 requesting tax exemption for the importations and local purchases related to the project Renewable Energy Technologies for Seaweed ("RETS Project") in Tawi-Tawi that is being implemented by the United Nations Industrial Development Organization (" UNIDO "). The facts as represented are as follows: The RETS Project is a UNIDO-assisted project and is co-funded by the European Union (EU) under the Access to Sustainable Energy Programme ("ASEP"). It aims to reduce, if not eliminate, poverty in the seaweed farming communities of Tawi-Tawi and to strengthen their economic and climate resilience through the integration of energy access improvement with overall rural development efforts, plans and programs. This objective is sought to be achieved by increasing and extending the availability of electricity service in island municipalities of Sitangkai, Panglima Sugala, Tandubas, and Sibutu, the home of about 15,000 seaweed farmers, through the renewable energy hybridization of the island grids in the municipalities of Sitangkai and Sibutu; by integrating the assessment and design of a feasible water supply system; by increasing the production of raw dried seaweeds and the value added of seaweed farming and increasing its income and employment generation potential through the availability of electricity services and use of renewable energy technologies; and by improving the delivery of community services such as health and nutrition, education, sanitation through the availability of electricity services in off-grid and rural seaweed farming communities. The RETS Project is time-sensitive and will end in December 2021. UNIDO, a specialized agency of the United Nations, is the lead implementor of the ongoing, while Mindanao Development Authority ("MINDA"), Tawi-Tawi Electric Cooperative ("TAWELCO"), Association of Island Electric Cooperatives, Inc.-Island Light and Water Energy Development Corp. ("AIEC-ILAW"), and One Renewable Energy Enterprise Inc. ("OREEI") are its executing partners. Among the project partners, AIEC-ILAW was identified as the most appropriate entity to execute the component on hybrid system installation considering its full-scale experience in developing off-grid projects of this kind, and to further build local capacity for renewable energy integration among their member electric cooperatives as part of the project's sustainability plan. AIEC-ILAW will likewise provide technical project planning and implementation support to MINDA and UNIDO technical staff, field training and capacity building support to TAWELCO, and, project installation support to TAWELCO and MINDA/UNIDO. On the other hand, OREEI was responsible for engineering, procurement and construction ("EPC"). As EPC contractor, it will handle the supply, delivery, and installation of the two solar PV-diesel generator hybrid systems. AIEC-ILAW and OREEI, as executing partners for the RETS Project, are performing services on behalf of UNIDO. During the implementation of the EPC of the solar-diesel hybrid systems, OREEI would need to import certain components, which may take about five (5) shipments or more from multiple suppliers, and to import and locally purchase other equipment for the RETS Project. Based on the foregoing representations, UNIDO now requests for a confirmatory ruling that OREEI's importation and local purchase of equipment and components for the RETS Project are exempt from Value-Added Tax (VAT). In reply, please be informed as follows: Sections 106 (A) and 108 (A) of the National Internal Revenue Code (NIRC) of 1997, as amended by Republic Act No. 10963, otherwise known as the Tax Reform for Acceleration and Inclusion (TRAIN) Act generally subjects every sale of goods or properties, and services to 12% VAT. However, Sections 106 (A) (2) (b) and 108 (B) (3) of the NIRC subject to zero percent (0%) VAT the sale of goods or properties as well as sale services by VAT-registered persons to persons who are exempt from VAT under special laws or international agreements to which the Philippines is a signatory, 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. xxx xxx xxx (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: xxx xxx xxx (b) 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. x x x" " 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. 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; x x x" On the other hand, while Section 107 of the NIRC imposes 12% VAT on every importation of goods, Section 109 (1) (K) of the NIRC recognizes the exemption from VAT of certain transactions, including importations, pursuant to an international agreement to which the Philippines is a signatory, thus: " 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; x x x" Relative thereto, Article XI of the Basic Co-operation Agreement between the United Nations Industrial Development Organization and the Government of the Republic of the Philippines ("Basic Co-operation Agreement") entered into by the parties on 26 February 1993 provides that: " Article XI Facilities for Implementation of UNIDO Assistance 1. The Government shall take any measures which may be necessary to exempt UNIDO, its experts and other persons performing services on its behalf from regulations or other legal provisions which may interfere with operations under this Agreement and shall grant them such other facilities as may be necessary for the speedy and efficient implementation of UNIDO assistance. It shall, in particular, grant them the following rights and facilities : xxx xxx xxx (f) Any permits necessary for the tax and duty-free importation of equipment, materials and supplies, and for their subsequent tax and duty free exportation; (g) Any permits necessary for tax and duty-free importation of property belonging to and intended for the personal use or consumption of officials of UNIDO, or of other persons performing services on its behalf, and for the subsequent tax and duty-free exportation of such property; and xxx xxx xxx" (Emphasis supplied) Under the Basic Co-operation Agreement, the Philippine government has agreed to grant UNIDO, its experts and other persons performing services on its behalf, exemption from regulations and legal provisions which may interfere with operations under the Agreement, as well as tax and duty-free importation of equipment, materials and supplies as may be necessary for the speedy and efficient implementation of UNIDO-assisted projects. Considering that OREEI, the contractor engaged for implementing the EPC of the solar-diesel hybrid systems of the RETS Project, is performing services on behalf of UNIDO, this Office is of the opinion as it hereby rules that OREEI's importations of the following equipment and components, which may take about 5 shipments or more from multiple suppliers, are exempt from VAT pursuant to Section 109 (1) (K) of the NIRC, as amended: Items Description Country of Origin RISEN Battery Energy Storage System Containerized Li-Ion energy storage system with battery management system and power conversion system China RISEN Solar PV Panels 500-Wp monocrystalline solar PV modules China Clenergy Solar Panel Mounting Structure Anodized aluminum rails, supports and clamps for ground-mounted solar PV system China Cummins Genset Diesel generator, 3-phase, silent type with generator control and protection panel and weatherproof/soundproof enclosure India Sungrow Multi MPPT String Inverter for solar PV System China However, OREEI's local purchases of equipment, supplies and materials for the RETS Project are subject to twelve percent (12%) VAT pursuant to Section 106 (A) of the NIRC, there being no clear, positive or express grant of exemption from payment of VAT to UNIDO or other persons performing services on its behalf under the NIRC or the Basic Co-operation Agreement. It must be emphasized that the Basic Co-operation Agreement relates to tax and duty-free importations, but not tax-free local purchases, of equipment, supplies and materials. This ruling is issued on the basis of the facts as represented. However, if it will be disclosed upon investigation 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.) CAESAR R. DULAY Commissioner of Internal Revenue