ITAD BIR Ruling No. 130-12

March 23, 2012 ITAD BIR RULING NO. 130-12 Articles 3 (Definitions), 5 (Subsidiary Arrangements) and 7 (Project Supplies and Professional and Technical Material and Services); Philippines-Australia Agreement on Development Cooperation Coffey International Development 3rd Floor, JMT Building ADB Avenue, Ortigas Center Pasig City Attention: Michael Sadlon Manager Contracts and Technical Services Gentlemen : This refers to your letter dated November 8, 2011 requesting for the issuance of a ruling confirming the exemption from value-added tax ("VAT") of the Philippines-Australia Human Resource and Organisational Development Facility 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 23, 2010 , the National Economic and Development Authority ("NEDA") and the Civil Service Commission ("CSC") and the Australia Agency for International Development ("AusAID") entered into a Subsidiary Arrangement Relating to the Philippines-Australia Human Resource and Organisational Development Facility. The Facility will be implemented for a period of five years and the Australia government's contribution thereof will cease after such period. The Facility will be located in the Philippines with the main office in Metro Manila and a field office. The Facility builds on a previous program of assistance which commenced in 2004 and is due to be completed on September 30, 2010. The goal of the Facility is to enhance the effectiveness of selected programs and reform agenda under the Philippines-Australia Development Assistance Strategy 2007-2011. The Facility will also manage Australia Awards programs such as the Australian Development Scholarships and the Australia Leadership Awards Scholarships. The objectives of the Facility are as follows: DcTAIH Development Objectives a) To develop or strengthen human resource development, human resource management, planning, management, administration competencies and organizational capacities of targeted individuals, organisations and groups of organisations and support systems for services delivery; b) To enable targeted individuals and organisations to make better use of human resource development, human resource management, planning management, administration and support systems for service delivery competencies and organizational capacities; and c) To enable individuals and organisations to build and maintain relationships, share and build on enhanced competencies, capacities, and lesson learned from research and knowledge synthesis initiatives. Management Objectives a) To ensure efficient and effective targeting or organisations and delivery of human resource and organizational development assistance in support of the implementation of the Philippines-Australia Development Assistance Strategy; b) To ensure effective engagements with strategically selected organisations, groups of organisations and individuals to identify their needs with respect to development of the Facility targeted competencies and capacity in relation to the Strategy; and c) To ensure that selected organisations, groups of organisations and individuals receive appropriate types and quality of support. The Implementing Agencies are NEDA and CSC for the Philippines and AusAID for Australia. NEDA is primarily responsible for formulating continuing, coordinated and fully integrated social and economic policies, plans and programs of the Philippines. It is situated at 12 Saint Josemaria Escriva Drive, Ortigas Center, Pasig City, Philippines. CSC is a constitutional body mandated to promote morale, efficiency, integrity, responsiveness, progressiveness, and courtesy in the Civil Service. It is situated at Constitution Hills, Batasang Pambansa Complex, Diliman, Quezon City, 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. EAIcCS AusAID will engage a suitably qualified Managing Contractor to carry out management and administration of the Facility. The Managing Contractor may subcontract delivery of program activities under Subsidiary Arrangement. The contribution of the Australian Government to the Facility is up to 65 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. On September 24, 2010, AusAID entered into a Contract with Coffey International Development Pty. Ltd. ("Coffey") where the latter was appointed as the Managing Contractor to implement the Facility under the subsidiary Arrangement. Coffey is a corporation organized and existing under the laws of Australia, situated at Level 2, 70 Hindmarsh Square, Adelaide, South Australia, Australia. It has a local office at 3rd Floor, JMT Building, ADB Avenue, Ortigas Center, Pasig City, Philippines. Ruling Relative thereto, please be informed that under Sections 106 (A) (2) (c), 108 (B) (3) and 109 (1) (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." "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. DHTCaI 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;" 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. TSIaAc Accordingly, since the Subsidiary Arrangement Relating to the Facility between the Australian Government, through AusAID, and the Philippine Government, through the NEDA and the CSC, was concluded pursuant to the Philippines-Australia Agreement on Development Cooperation, and since the Facility and the Managing Contractor under the Subsidiary Arrangement constitute Australian institutions, firms or organizations for the purpose of the Agreement, the Facility and the Managing Contractor (namely, Coffey ) 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 Facility and Coffey shall be subject to VAT at zero percent, while importation of goods or properties made directly by the Facility and Coffey 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 Facility and Coffey. 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