ITAD BIR Ruling No. 111-12

March 1, 2012 ITAD BIR RULING NO. 111-12 Articles 3 (Definitions),5 (Subsidiary Arrangements) and 7 (Project Supplies and Professional and Technical Material and Services); Philippines-Australia Agreement on Development Cooperation Philippines-Australia Public Financial Management Program 3rd Floor, JMT Building ADB Avenue, Ortigas Center Pasig City Attention: Warrant Turner Team Leader Gentlemen : This refers to your letter dated October 25, 2011 requesting for the issuance of a ruling for exemption from value-added tax ("VAT") to the Philippines-Australia Public Financial Management Program pursuant to the General Agreement on Development Cooperation between the Government of the Republic of the Philippines and the Government of Australia ("Philippines-Australia Agreement on Development Cooperation"). FACTS On September 15, 2011, the Department of Budget and Management ("DBM") and the Australia Agency for International Development ("AusAID") entered into a Subsidiary Arrangement Relating to the Philippines-Australia Public Financial Management Program. The goal of the Program is improvement in the efficiency, accountability and transparency of public fund use in the Philippines to enable better service delivery. The Program will assist the Philippine Government to implement its Philippines Public Financial Management Reform Roadmap. The direction, decisions and activities under the Program will be guided by four Strategic Objectives: Objective 1: Increase the efficiency and effectiveness of the allocation, utilization and reporting of budgeted funds by oversight agencies. Objective 2: Improve public financial management in select departments to enable more efficient utilization and accountability of public funds for service delivery. Objective 3: Generate more timely, reliable and accessible public expenditure management information. Objective 4: Strengthen external oversight of public expenditure management linked to physical performance information. The DBM is an agency of the Philippine Government mandated to promote the sound, efficient and effective management and utilization of government resources ( i.e., technological, manpower, physical and financial) as instrument in the achievement of national socioeconomic and political development goals. It is situated at General Solano St. Malacaang, Manila, Philippines. AusAID is an agency of the Australian Government responsible for managing Australia's overseas aid program. AusAID is an executive agency within the Foreign Affairs and Trade portfolio and reports to the Minister for Foreign Affairs. Its head Office is at 255 London Circuit, Canberra, Australia, and its local office is at the Australian Embassy in the Philippines at Level 23, Tower 2, RCBC Plaza, 6819 Ayala Avenue, Makati City, Philippines. HTSIEa The contribution of the Australian Government to the Program is up to 30 million Australian dollars. AusAID will directly manage the Program and designate its personnel to the positions of Team Leader and Program Coordinator. AusAID will contract a suitably qualified Service Provider to carry out the administration of the Program. The Service Provider may subcontract the delivery of mutually agreed activities under the Program. The Service Provider will establish a Program Office in Metro Manila that is readily accessible to the Philippine Government, AusAid and other program partners. RULING Relative thereto, please be informed that under 106 (A) (2) (c), 108 (B) (3) and 109 (1) (K) Section 109 (K) of the National Internal Revenue Code of 1997, as amended, certain transactions involving the sale of goods or properties and the sale of services and the use or lease of properties are subject to VAT at zero percent or are exempt from VAT (where no output VAT is shifted or passed on to the buyer, transferee, user, or lessee of goods, properties, or services) if they are treated as such 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 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: 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." EaSCAH "SEC 108. Value-added Tax on Sale of Services and 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;" "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 international agreement, you cite the Philippines-Australia Agreement on Development Cooperation. Paragraph 1 (a),Article 7 thereof provides: "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;" AcICHD In relation thereto, paragraph 1, Article 5 and subparagraph (a),Article 3 of the Agreement provide: "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." "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; Accordingly, since the Subsidiary Arrangement Relating to the Program between the Australian Government, through AusAID, and the Philippine Government, through the DBM, was concluded pursuant to the Philippines-Australia Agreement on Development Cooperation, and since the Program and the Service Provider under the Subsidiary Arrangement constitute Australian institutions, firms or organizations for the purpose of the Agreement, the Program and the Service Provider are entitled to the tax exemption under paragraph 1 (a),Article 7 of the Agreement. Specifically, the sale of goods or properties and the sale of services and the use or lease of properties made directly to the Program and the Service Provider shall be subject to VAT at zero percent, while importation of goods or properties made directly by the Program and the Service Provider shall be exempt from VAT, pursuant to paragraph 1 (a),Article 7 of the Agreement. The zero-rating and exemption, however, do not apply to the subcontractors of the Program and the Service Provider. 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. aEAcHI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue