ITAD BIR Ruling No. 103-12

February 22, 2012 ITAD BIR RULING NO. 103-12 Article IV (Property, Funds and Assets), Host Agreement between the Republic of the Philippines and the World Health Organization; VAT Ruling No. 143-90 World Health Organization Regional Office for the Western Pacific United Nations Avenue P.O. Box 2932, 1000 Manila Gentlemen : This refers to your request for an updated value-added tax ("VAT") exemption certificate as endorsed to us by the Department of Foreign Affairs in its letter dated June 13, 2011. The World Health Organization (WHO) is the directing and coordinating authority on international health within the United Nations' system. WHO produces health guidelines and standards, and help countries to address public health issues. In reply, please be informed that the sale of goods or properties, services, and the lease of properties, in the Philippines, are subject to VAT pursuant to Section 106 (A) and 108 (A) of the National Internal Revenue Code of 1997 ("Tax Code"), 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%) 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%), . . ." "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. HIaSDc (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, 2 raise the rate of value-added tax to twelve percent (12%). . ." Under Section 105 of the Tax Code, the VAT is the liability of the seller or lessor but since it is an indirect tax, VAT may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services, thus: "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. The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716. . ." However, under Section 106 (A) (2) (c), 108 (B) (3) and 109 (1) (K) of the Tax Code, certain transactions are subject to VAT at zero percent rate or exempt from VAT 3 (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) 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 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. xxx xxx xxx (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: TacADE 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. 108. Value Added Tax on Sale of Goods or 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." "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 ("WHO"). 4 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. HTaIAC 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 property 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, WHO, its assets, income and other property, shall be exempt from all direct and indirect taxes. As to indirect taxes, the Supreme Court, in Commissioner of Internal Revenue vs. John Gotamco & Sons, Inc. and the Court of Tax Appeals (G.R. No. L-31092 dated February 27, 1987), affirmed the entitlement of WHO to exemption from indirect taxes normally imposed on the purchase of goods and services in the Philippines, such as the previous 3 percent contractor's tax (gross receipts tax) which the relevant building contractor shifted or passed on to the WHO as additional cost to the construction of its office building in the Philippines. This tax, which the Court deemed as an indirect tax, cannot be shifted or passed on to WHO by citing Section 12, Article IV of the Agreement which obliges the Philippines, as host country, to make appropriate administrative arrangements for the remission or return of the amount of duty or tax paid by WHO on its purchase of property in the Philippines. 5 Accordingly, since VAT is an indirect tax, this tax cannot be shifted or passed on to WHO as buyer, transferee or lessee of goods, properties or services in the Philippines, pursuant to Section 11, Article IV of the Agreement. This being the case, the sale of goods and services, and the lease of properties, in the Philippines, to WHO are subject to VAT at zero percent or exempt from VAT, as applicable, pursuant to Section 106 (A) (2) (c), 108 (B) (3) and 109 (1) (K) of the Tax Code, in relation to Sections 11 and 12 Article IV of the Host Agreement. 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. Ibid. 3. 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+." 4. 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. 5. Pertinent portion of this Decision reads: "The Host Agreement, in specifically exempting the WHO from indirect taxes, contemplates taxes which, although not imposed upon or paid by the Organization directly, form part of the price paid or to be paid by it. This is made clear in Section 12 of the host Agreement which provides: '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 property 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 supplied) The above-quoted provision, although referring only to purchases made by the WHO, elucidates the clear intention of the Agreement to exempt the WHO from 'indirect' taxation . The Certification issued by the WHO, dated January 20, 1960, sought exemption of the contractor, Gotamco, from any taxes in connection with the construction of the WHO office building. The 3% contractor's tax would be within this category and should be viewed as a form of an 'indirect tax' on the Organization, as the payment thereof or its inclusion in the bid price would have meant an increase in the construction cost of the building." (underscoring ours)