Australian Embassy

October 1, 2018 ITAD BIR RULING NO. 086-18 Section 109 of NIRC of 1997, as amended; Articles 5 and 7 of GADC; Paragraphs 1, 4 and 9 of Subsidiary Arrangement-Pathways Australian Embassy 23rd Floor, Tower 2, RCBC Plaza 6819 Ayala Ave. 1200 Makati City Gentlemen : This refers to your letter dated 11 December 2017, which was indorsed by the Department of Foreign Affairs and received by this Office on 17 January 2018, requesting for Value-Added Tax (VAT) Exemption and/or Ruling on the purchase of goods and services for the Palladium International Pty. Ltd. (PIPL) relative to the implementation of Education Pathways to Peace in Mindanao (PATHWAYS) Program and the General Agreement on Development Cooperation between the Government of Australia and the Government of the Republic of the Philippines (GADC). HcSaAD It is represented that PIPL is the managing contractor of PATHWAYS Program on behalf of the Government of Australia (GOA);that the over-all goal of the nine-year PATHWAYS Program is to improve educational performance and equity in the attainment of quality basic education by children in the Autonomous Region in Muslim Mindanao (ARMM),contributing to more resilience, stability, peace and prosperity in Mindanao; that a Program Management Office will be located within the ARMM Regional Department of Education premises in Cotabato City and a coordination sub-office within the ARMM Manila Liaison Office in Makati City, Metro Manila; that the contributions of the GOA will cover implementation, management and monitoring of PATHWAYS and other related activities; and that funding contributions of the Government of the Republic of the Philippines (GPH) will cover costed items for office spaces, utilities and budget resources that will enable counterparts to participate fully in PATHWAYS related activities and other administrative costs necessary for efficient implementation. Generally, 12% VAT shall be imposed on the sale, barter or exchange of goods or properties and services in the Philippines pursuant to Sections 106 to 108 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 Law), 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, a 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" " SEC. 107. Value-Added Tax on Importation of Goods. (A) In General. There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to twelve percent (12%) based on the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody: Provided, That where the customs duties are determined on the basis of the quantity or volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if any. xxx xxx xxx" " 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" There are, however, transactions which are exempt from VAT by virtue of special laws or international agreements to which the Philippines is a signatory under Section 109 of the NIRC of 1997, as amended, to wit: " 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; xxx xxx xxx" In the instant case, the GADC, being an international agreement, may be made the basis for VAT exemption. Articles 5 and 7 thereof provide: " Article 5 Subsidiary arrangements 1. In support of the objectives of this Agreement, the Government of Australia and the Government of the Republic of the Philippines, and their agencies, statutory authorities or organizations, may conclude subsidiary arrangements in respect of specific activities. 2. Subsidiary arrangements shall make specific reference to this Agreement and the terms of this Agreement shall, unless otherwise stated, apply to such subsidiary arrangements .Wherever possible, such subsidiary arrangements shall set out: xxx xxx xxx" (Underscoring supplied) " 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 ; xxx xxx xxx" (Underscoring supplied) Meanwhile, Paragraph 1 of the Subsidiary Arrangement between the Government of Australia and the Government of the Philippines Relating to the Education Pathways to Peace in Mindanao (Subsidiary Agreement-Pathways) made express mention of the applicability of the terms of the GADC to this Agreement: "1. GENERAL 1.1 This Subsidiary Arrangement expresses the understanding and intentions of the Government of the Republic of the Philippines (GPH) and the Government of Australia (GOA) (the "Partners") and is made pursuant to the terms of Article 5 of the General Agreement on Development Cooperation done at Sydney, on 28 October 1994 (the "GADC"). The terms of the GADC apply to this Subsidiary Arrangement ." (Underscoring ours) In view of the foregoing, the GADC, to which the Philippines is a signatory, subjects direct supplies of domestic goods and services to zero rate with respect to VAT, and exempts direct importation of goods from VAT and other taxes imposed in the Philippines. The GADC also provides that subsidiary arrangements may be concluded by GOA and GPH; and that the terms of the GADC shall be applicable to the subsidiary arrangements as long as the latter make specific reference to the former. It is clear from the foregoing provision that the terms of the GADC shall also apply to the Subsidiary Agreement-Pathways. Moreover, Paragraphs 4 and 9 of the Subsidiary Arrangement-Pathways provide, to wit: " 4. COORDINATING AUTHORITIES 4.1. The Coordinating Authorities for the Activity will be: For the GOA: Department of Foreign Affairs and Trade (DFAT) For the GPH: Department of Education Central Office (DepEd-CO) Office of the ARMM Regional Governor Department of Education-Autonomous Region in Muslim Mindanao (DepEd-ARMM) 4.2 DFAT may engage suitably qualified contractors and/or organisations to carry out any of its functions under this Subsidiary Arrangement. xxx xxx xxx" " 9. MATERIALS, SERVICES AND EQUIPMENT TO BE SUPPLIED GOA 9.1 The GOA will provide the following materials, services and equipment for the Activity: b. services of a contractor that will be responsible for the management of activity implementation. xxx xxx xxx" To reiterate, PIPL is the managing contractor of PATHWAYS on behalf of the GOA. Thus, the sale of goods and services by VAT-registered persons to PIPL directly in connection with PATHWAYS shall be subject to VAT at zero percent (0%) rate, while the direct importation of PIPL for PATHWAYS shall be VAT-exempt pursuant to Article 7 of GADC. It is worthy to mention, however, that herein grant of exemption covers only purchases or importation in connection with PATHWAYS and does not give VAT exemption to PIPL itself. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. SCADIT Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue