ITAD BIR Ruling No. 112-15

April 30, 2015 ITAD BIR RULING NO. 112-15 Philippines-Australia General Agreement on Development Cooperation Department of Social Welfare and Development KALAHI CIDSS-NCDDP NPMO Bldg. DSWD, Batasan Pambansa Complex Constitution Hills, Quezon City Attention: Priscilla N. Razon Regional Director Gentlemen : This refers to your letters dated July 31, November 7, and November 13, 2014 requesting confirmation that domestic purchases of goods and services made by the Department of Social Welfare and Development ("DSWD") for the implementation of the Direct Funding Agreement between the Government of the Republic of the Philippines (GOP), as represented by the DSWD and the Government of Australia (GOA), as represented by the Department of Foreign Affairs and Trade (DFAT) in relation to the Project: Improving Access to Early Learning through Community-led Approach 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 GOP 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 GOP 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 the GADC, the DSWD and the DFAT entered into a subsidiary arrangement denominated as Direct Funding Agreement ("Agreement") on the 22 May 2014 to grant support for the Philippine Government's Improving Access to Early Learning through Community Led Approach ("Program"). It is also represented that the Program has two parts: (1) the Conditional Cash Transfer Program (CCTP) ; and (2) the National Community Driven Development Program (NCDDP) . It is represented that the DSWD has a proven track record of using the community-led approach in classroom and day care center construction. It has implemented the KALAHI CIDSS Community Driven Development (KALAHI CIDSS CDD) since 2003 to improve responsiveness of government to community needs through the implementation of sub-projects. KALAHI CIDSS CDD is a multi-donor funded government project supported by World Bank, Asian Development Bank, and the Australian Government, among others. It has resulted in improved access of communities to basic services, increased community involvement and positive impact on household well-being. The GOP is expanding KALAHI CIDSS CDD from 364 to 854 poorest municipalities to benefit around 5 million households in 19,000 villages. The expanded program is the NCDDP. The NCDDP aims to empower communities in targeted poor municipalities to achieve improved access to services and to participate in more inclusive local planning, budgeting and implementation. GOA will provide a contribution of a minimum of Php487,000,000 over two years (June 2014-December 2016) to the NCDDP to fund the construction of approximately 468 day care centers and classrooms in 177 poor municipalities nationwide including the areas affected by typhoon Yolanda in support of the GOP's basic education and poverty reduction priorities. This is the second phase of the GOA support using the same community-led approach for classroom and day care center construction. Based on the above representations, you now seek confirmation on the VAT treatment on domestic purchases of goods and services by DSWD for the implementation of the NCDDP provided under Section 1, Article 7 of the GADC. In reply, please be informed that Section 114 (C) of the National Internal Revenue Code of 1997, as amended ("Tax Code") provides for the general rule that sale of goods and services to government or any of its agencies is subject to the final withholding VAT of five percent (5%), to wit: "SEC. 114. Return and Payment of Value-Added Tax . xxx xxx xxx (C) Withholding of Value-added Tax. The government or any of its political subdivisions, instrumentalities or agencies including government-owned or controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and/or of services which are subject to value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold a final value-added tax at the rate of five percent (5%) of the gross payment thereof. . . For purposes of this Section, the payor or person in control of the payment shall be considered as the withholding agent. . ." 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, 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. 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 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 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." 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 GOP 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 or imported outside the Philippines for the implementation of an activity funded by GOA in relation to the GADC shall be subject to zero percent VAT while services will be subject to zero percent VAT only when rendered by individuals or general professional 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 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 GOP and GOA in respect of specific activities. Accordingly, since the NCDDP was created and funded by GOA through the Agreement , a subsidiary arrangement in support of the objectives of the GADC, this Office is of the opinion and so holds that direct purchases of domestic goods and services of individuals or general professional partnerships registered in the Philippines by the DSWD, as the implementing agency of the Agreement , through the KALAHI CIDSS CDD are subject to zero percent (0%) VAT and DSWD's direct importation of project supplies is exempted from VAT while the direct importation of professional and technical materials will be exempted from VAT only when it is imported by an Australian institution, firm, organization or an Australian personnel contemplated under Article 3 (a) and (b) of the GADC pursuant to paragraph 1 (a), 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