ITAD BIR Ruling No. 134-16

December 2, 2016 ITAD BIR RULING NO. 134-16 Articles 3, 5 & 7 Philippines-Australia Agreement on Development Cooperation; BIR Ruling No. ITAD 130-12 Coffey International Development 3rd Floor, JMT Building ADB Avenue, Ortigas Center, Pasig City Attention: AAA _______________ Gentlemen : This refers to Note No. 209/16 dated 24 May 2016 of the Australian Embassy, indorsed to this Bureau by the Department of Foreign Affairs (DFA) requesting extension of the value-added tax (VAT) exemption privileges accorded under BIR Ruling No. ITAD-130-12 to Coffey International Development Pty. Ltd. (Coffey) ,as the Managing Contractor of the Philippines-Australia Human Resource and Organizational Development Facility (Facility) ,pursuant to the General Agreement on Development Cooperation between the Government of the Republic of the Philippines and the Government of Australia (GPH-GOA Agreement). It is represented that on 23 September 2010, the National Economic and Development Authority (NEDA),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 Organizational Development Facility (Subsidiary Agreement) ; that on 24 September 2010, AusAID entered into a Contract with Coffey, where the latter was appointed as the Managing Contractor to implement the Facility under the Subsidiary Arrangement; that Coffey is a corporation organized and existing under the laws of Australia, having a local office in the Philippines; that the Facility will be implemented for five (5) years, with an end date of 30 September 2015; and that BIR Ruling No. ITAD-130-12 was issued on 23 March 2012 confirming that, for the 5-year term of the Facility, the sale of goods or properties, the sale of services and the use or lease of properties made directly to the Facility and Coffey are subject to VAT at zero percent, and that the importation of goods and properties made directly by the Facility and Coffey is exempt from VAT, pursuant to the GPH-GOA Agreement. CAIHTE It is also represented that pursuant to the Australian Embassy's Exchange of Letters with NEDA in a letter dated 16 February 2016, and with the Department of Budget and Management (DBM) in a letter dated 26 January 2016, the proposal of the Australian Embassy to amend certain provisions of the Subsidiary Arrangement, as authorized under Section 14 of the Subsidiary Arrangements, was approved and agreed to by the Donor (Department of Foreign Affairs and Trade [DFAT, formerly AusAID]),and the Implementing Agencies (NEDA, CSC and DBM),thereby extending the duration of the Facility for an additional period of Eighty-one (81) months. Accordingly, the initial end date of 30 September 2015 was extended to 31 December 2016. It is finally represented that with the extension of the duration of the Facility, the Australian Embassy now requests the BIR to grant to the Facility and to Coffey, as the Managing Contractor, a further exemption from VAT until 31 December 2016 with the same terms as per BIR Ruling ITAD 130-12. In reply, 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 (NIRC), 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 (0%), 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 of 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 person 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." xxx xxx xxx " SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. (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. (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; xxx xxx xxx" " 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 agreements, Paragraph 1 (a) Article 7 of the GPH-GOA Agreement provides, viz. : " 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 GPH-GOA Agreement, 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." " 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;" DETACa Based on all of the foregoing, since the Subsidiary Arrangement relating to the Facility between the Australian Government, through DFAT (formerly, AusAID),and the Philippine Government, through NEDA, CSC and DBM, was concluded pursuant to the GPH-GOA Agreement, and, since the Facility and the Managing Contractor under the Subsidiary Arrangement constitute Australian institutions, firms or organizations for the purpose of the GPH-GOA Agreement, the Facility and Coffey are entitled to the tax exemption under paragraph 1 (a),Article 7 of the Agreement. Therefore, the sale of goods or properties, the sale of services and the use or lease of properties made directly to the Facility and to Coffey shall be subject to VAT at zero percent (0%),while importation of goods or properties made directly by the Facility and by Coffey shall be exempt from VAT, pursuant to paragraph 1 (a),Article 7 of the GPH-GOA Agreement. The hereby grant of VAT zero-rating and exemption to the Facility and to Coffey shall cover the additional duration of the Facility with end date on 31 December 2016. The VAT zero-rating and exemption, however, shall not apply to the subcontractors of the Facility and of 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.) CAESAR R. DULAY Commissioner of Internal Revenue