ITAD BIR Ruling No. 158-12

April 10, 2012 ITAD BIR RULING NO. 158-12 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: David Goodwins Country Manager Gentlemen : This refers to your letter dated October 3, 2011 requesting clarification on certain pronouncements made by this Bureau in BIR Ruling No. DA-ITAD 94-09 dated September 24, 2009 concerning the exemption from value-added tax ("VAT") of the Philippines-Australia Provincial Roads Management 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 November 25, 2010, the Department of the Interior and Local Government ("DILG") and the Australia Agency for International Development ("AusAID") entered into a Memorandum of Subsidiary Arrangement Relating to the Philippines-Australia Provincial Road Management Facility which supersedes the previous Subsidiary Arrangement dated March 27, 2009. The goal of the present Subsidiary Arrangement is to increase economic growth and improve access to public infrastructures and services in Southern Philippines. The Facility will provide grant assistance directly to, or in support of, selected Provincial Governments in the Philippines. The Implementing Agencies are the DILG and Partner Provincial Governments for the Philippines and AusAID for Australia. Following selection to participate in the Facility, a Partner Provincial Government will sign a Memorandum of Arrangement with the DILG and AusAID accepting the principles and implementing arrangement of the Facility. The DILG is responsible for promoting peace and order, ensuring public safety, and strengthening capability of local government units through active people participation and a professionalized corps of civil servants in the Philippines. It is situated at A. Francisco Gold Condominium II, EDSA corner Mapagmahal Street, 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. TEcHCA The Australian Government's contribution to the Facility is up to 100 million Australian dollars, which will cease after a period of five years. AusAID will engage a suitably qualified Facility Managing Contractor to carry out management and administration of the Facility. The Managing Contractor may subcontract delivery of program activities under the Subsidiary Arrangement. Based on the letter issued by AusAID on October 5, 2011, AusAID appointed Coffey International Development Pty. Ltd. ("Coffey") as the Facility Managing Contractor to carry out the management and administration of 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 in either case no output VAT is being 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. ASHEca 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. 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;" HEcTAI 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;" Accordingly, since the Subsidiary Arrangement Relating to the Facility between the Australian Government, through AusAID, and the Philippine Government, through the DILG NEDA and the Partner Provincial Governments, was concluded pursuant to the Philippines-Australia Agreement on Development Cooperation, and since the Facility and the Facility 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. As to your concern on the application of the subject exemption and zero-rating to previous BIR Ruling No. DA-ITAD 94-09 issued to Coffey, we reiterate that only those transactions directly made by Coffey and not by its subcontractors are qualified to such exemption or zero-rating. 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. DHITcS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue