ITAD BIR Ruling No. 093-16

May 16, 2016 ITAD BIR RULING NO. 093-16 Philippines-Australia General Agreement on Development Cooperation Embassy of Australia Level 23-Tower 2 RCBC Plaza 6819 Ayala Avenue, Makati City, 1200 Attention: Mark Pruden Business Unit Manager Cardno Emerging Markets Gentlemen : This refers to your letter dated October 16, 2014 1 requesting confirmation that purchases of program supplies, professional and technical materials and services made by Cardno Emerging Markets (Australia) Pty. Ltd. (Cardno) pursuant to the Subsidiary Arrangement between the Government of the Philippines (GPH) and the Government of Australia (GOA) for the implementation of the Basic Education Sector Transformation (BEST) Program are subject to exemption/zero percent value-added tax ("VAT") pursuant to the Philippines-Australia General Agreement on Development Cooperation ("GADC") . It is represented that the GPH and GOA signed GADC on the 28th of October 1994 in Sydney, Australia to strengthen the existing cordial relations between the two governments and to foster development cooperation between the Philippines and Australia. Under the GADC, the GPH and GOA or their agencies, statutory authorities or organizations may conclude subsidiary arrangements in respect of specific activities. It is further represented that pursuant to Art. 5 of the GADC, the GPH through the Department of Education (DepEd) and the GOA through the Department of Foreign Affairs and Trade represented by the Development Cooperation Branch, Australian Embassy in Manila (Australian Embassy) signed on the 21st of February 2014 a subsidiary arrangement relating to the BEST Program; that BEST will be implemented until 30 June 2019 and will be covered by the subsidiary arrangement in accordance with the mechanism approved by both GOA and GPH and subject to normal Australian annual parliamentary approval; that the objectives of BEST are: to contribute to improve quality of learning outcomes; to have more equitable access of boys and girls to education; and to improve service delivery through better governance. It is also represented that GOA will provide project vehicles, office equipment and commodities to support the functioning of BEST in the DepEd Central Office and in the target regions; that all motor vehicles provided by GOA for the program's use will be registered and insured in the name of the Australian Embassy and BEST; that at the end of the program, all motor vehicles and office equipment will be returned to GOA who will reassign the same in accordance with the requirements of the GADC to the Philippines; that on the other hand, the GPH will be responsible in coordinating with the concerned agencies to obtain exemption on value-added tax (VAT) and other duties and taxes imposed in the Philippines; be responsible for inspection fees, storage charges and all other levies, fees and charges levied in the Philippines; and facilitate the expeditious clearance and release of imported supplies and motor vehicles including the provision of appropriate customs and wharfage facilities. CAIHTE It is represented that the total GOA contributions are estimated to be up to A$150,000,000.00; that GOA contributions will cover implementation, management, monitoring and evaluation of the program and related activities; that the GOA contributions will be delivered through different modalities, including through a Facilitating Contractor (FC) which will be procured through a transparent open tender process; that the FC will work with the DepEd and Commission on Higher Education (CHED) and will be responsible for providing technical support and resources to implement, coordinate and monitor the BEST Program; and that the FC will recruit and sub-contract specialists and entities to implement activities to be identified in the Annual Plan process. It is also represented that on 21 July 2014, GOA, as represented by the Department of Foreign Affairs and Trade (DFAT), contracted the services of Cardno as the FC for BEST; that Cardno is a professional infrastructure and environmental services company, with expertise in the development and improvement of physical and social infrastructure for communities around the world; that as the FC for BEST, Cardno must provide all management services necessary for the provision of the Services. In addition to the other requirements specified by this Contract, at a minimum Cardno must provide the following management services: a) provide pre-mobilisation briefings to international Contractor Personnel including on security, medical/health situation, cultural environment, project objectives/details, and relevant contract obligations in accordance with Schedule 1 Clause 7.10 ; b) decision-making within the Contractor's organisation and the advising of DFAT of decisions required by DFAT; c) pro-actively identifying and rectifying problems or recommending strategies to DFAT on how to rectify problems, which may arise in, or during the performance of, the Services; d) managing those risks which are the Contractor's responsibility under this Contract in accordance with the Risk Management Plan including in relation to Supplies after delivery and before their incorporation into the Project; and e) attendance at briefings with DFAT and status reporting to DFAT on progress at the times required by DFAT. Based on the above representation, you now seek confirmation of the zero percent and exemption on VAT on purchases of goods and services by Cardno for the implementation of BEST provided under Article 7 of the GADC. In reply, please be informed that Section 105 of the National Internal Revenue Code of 1997, as amended ("Tax Code") provides: "SEC. 105. Persons Liable. Any person who, in the course of trade or business, sells barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. . . ." However, Section 106 (2) (c) of the Tax Code states that certain transactions involving the sale of goods or properties are subject to VAT at zero percent if they are treated as such under special laws or international agreements to which the Philippines is a signatory. Also, Section 109 (1) (K) of the same code exempts from VAT certain transactions which are exempt under international agreements to which the Philippines is a signatory, viz. : 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%) 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%), . . . xxx xxx xxx (2) Zero-rated Sales 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 to zero rate. DETACa 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 relation to the foregoing, paragraph 1 (a), Article 7 of the GADC provides that the Philippine Government shall subject to zero percent VAT, the direct supplies of domestic goods and services and shall exempt direct importation of goods from VAT with respect to projects carried out in the Philippines pursuant to the GADC, to wit: "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;" (Underscoring supplied) Further, Art. 3 (d) of the GADC defines project supplies and professional and technical material and services, also the terms Australian personnel and Australian institutions, firms and organizations as follows: "Article 3 Definitions In this Agreement: a) "Australian institutions, firms and organizations" means Australian institutions, firms or organizations engaged in a development activity under this Agreement; b) "Australian personnel" means Australian nationals or permanent residents or other persons who are not nationals or permanent residents of the Philippines who are working in the Philippines on an activity under this Agreement and whose salaries or other costs are funded from the contribution of the Government of Australia to the activity; xxx xxx xxx d) "Professional and technical material" means equipment and other goods imported by members of the Australian personnel or Australian institutions, firms and organizations for their professional use while engaged in an activity under this Agreement and paid for from funds provided by the Government of Australia; e) "Project supplies" means equipment, material and other goods supplied for the execution of development activities under this Agreement, the cost of which is funded from the contribution of the Government of Australia to the activity." aDSIHc f) "Services" means services performed by individuals or by general partnerships registered in the Philippines; xxx xxx xxx" Moreover, under Article 5 (1) of the GADC, the GPH and GOA may conclude subsidiary arrangements in respect of specific activities. Art. 5 (1) of the GADC provides: "Article 5 Subsidiary Arrangements 1. In support of the objective of this agreement, the Government of Australia and the Government of the Republic of the Philippines, or their agencies, statutory authorities or organizations may conclude subsidiary arrangements in respect of specific activities." Based on the foregoing provisions, project supplies procured within the Philippines for the implementation of an activity funded by GOA in relation to the GADC shall be subject to zero percent VAT while project supplies imported outside the Philippines shall be exempted from VAT. Whereas, services will be subject to zero percent VAT only when rendered by individuals or general partnerships registered in the Philippines. On the other hand, professional and technical materials will be exempted from VAT only when it is imported by Australian personnel or Australian institutions, firms and organizations, as defined above, for their professional use while engaged in an activity under the GADC and paid for from funds provided by the GOA. These privileges, in turn, extend to subsidiary arrangement which will be concluded between GPH and GOA in respect of specific activities. Accordingly, since Cardno , an Australian firm, was subcontracted by GOA through DFAT to implement BEST, a program created and funded by GOA by virtue of the subsidiary arrangement between GOA and GPH pursuant to the GADC, this Office is of the opinion and so holds that the direct purchases of goods and services from individuals or general partnerships registered in the Philippines by Cardno , are subject to zero percent (0%) VAT while the direct importation of project supplies, professional and technical materials by Cardno is exempted from VAT pursuant to paragraph Article 7 of the GADC. 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Received by this Office on 08 April 2015.