ITAD BIR Ruling No. 173-13

June 19, 2013 ITAD BIR RULING NO. 173-13 Sec. 109 (K), NIRC of 1997, as amended; Paragraph 4 (a), May 6, 2002 Diplomatic Exchange of Notes; Article 5, Technical Co-operation Agreement between the Philippines and Germany; RMC No. 31-2013 Platon Martinez Flores San Pedro & Leao Law Offices 6th Floor Tuscan Building 114 V.A. Rufino Street, Legaspi Village 1229 Makati City Attention: Atty. Grace P. Quevedo-Panagsagan Gentlemen : This refers to your letter dated 08 January 2013 on behalf of your client GESELLSCHAFT FR INTERNATIONALE ZUSAMMENARBEIT ("GIZ") requesting confirmation that, pursuant to previously issued rulings 1 of this Bureau: 1) All purchases of GIZ of materials and services in the Philippines are exempt from value-added tax ("VAT") pursuant to Section 109 (q) of the National Internal Revenue Code; and 2) Salaries paid by GTZ to its employees are exempt from withholding taxes on wages. DcSACE It is represented that GIZ is the new name of DEUTSCHE GESSELLSCHAFT FR TECHNISCHE ZUSAMMENARBEIT ("GTZ") GmbH effective 01 January 2011, per Note No. 275/10 dated 01 December 2010 of the Embassy of the Federal Republic of Germany and the Department of Foreign Affairs (DFA) Note No. 11-0197 dated 31 January 2011 wherein the DFA informed GIZ of its formal communication to the National Economic and Development Authority (NEDA) the renaming of GTZ to GIZ; that the renaming of GTZ as GIZ is part of Germany's technical cooperation reform with the intention of increasing its efficiency and effectiveness by unifying structures and processes under a single agency; that as of 01 January 2011, the German Development Service (DED) and InWEnt-Capacity Building International, Germany, will also be merged with the GIZ, which will continue the work of those two (2) organizations; that from the start of 2011, there will thus only be named the "Deutsche Gessellschaft fr Internationale Zusammenarbeit" (GIZ); that the said change of name shall have no effect on the existing arrangements and ongoing projects. In reply, please be informed as follows: On VAT Section 109 of the National Internal Revenue Code ("NIRC") of 1997, as amended, provides, viz. : "SEC. 109. Exempt Transactions . 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;" Based on the foregoing, a transaction is exempt from VAT when a special law or an international agreement to which the Philippines is a signatory provides for such exemption. The Agreement between the Government of the Federal Republic of Germany and the Government of the Republic of the Philippines Concerning Technical Co-operation ("Technical Co-operation Agreement") executed on 07 September 1971, together with the Diplomatic Exchange of Notes dated 06 May 2002 approving the Arrangement for the continuation of the GTZ Office in Manila, partakes the nature of an international agreement as provided in Section 109 (K) of the NIRC of 1997. Paragraph 4 (a) of the aforementioned Diplomatic Exchange of Notes is, in effect, a grant of exemption from VAT. It provides: " 4. The Government of the Republic of the Philippines shall make the following contributions: aEcTDI It shall (a) exempt the material and motor vehicles supplied for the Office from taxes, licenses, harbour dues, import and export duties and other public charges, as well as storage fees, and ensure that such material is cleared by customs without delay. The aforementioned exemptions shall, with regard to value-added tax (VAT), also apply to material and services (including consulting services) procured in the Republic of the Philippines, as well as to the renting of office premises and accommodation for seconded experts ; " (Underscoring ours) Based on the above, GIZ may continue to avail of VAT exemption on its purchases of materials, motor vehicles and services (including consultancy services) for its Office including its office rental payments. Consequently, the sale of materials, motor vehicles and services of a VAT-registered seller to GIZ shall be subject to VAT at zero-percent (0%) rate pursuant to Section 106 (A) (2) (c) of the NIRC of 1997, as amended. On Taxes on Wages/Salaries of the Employees of GIZ Paragraph 2, Article 5 of the Technical Cooperation Agreement states: "Article 5 The Government of the Republic of the Philippines shall: xxx xxx xxx (1) Levy no taxes or other fiscal charges on any emoluments paid from German public funds to German specialists of German construction and consulting firms for services rendered within the framework of the present Agreement." Underscoring supplied It is clear from the above provisions that only German specialists of German construction and consulting firms shall be exempt from Philippine income tax. Hence, while under Section 2.78.1 (B) (5) of Revenue Regulations No. 2-98, the GIZ, as an employer, is exempt from the duty to withhold tax on the compensation/salaries it pays to its employees since it is an agency of the Government of the Federal Republic of Germany, the Filipino employees of GIZ are liable to Philippine income tax on their salaries/wages received from the GIZ, as clarified by Revenue Memorandum Circular (RMC) No. 31-2013 dated 12 April 2013. Consequently, they are required to declare their income and pay the corresponding tax due thereon. In view of the foregoing and consistent with the aim of this Bureau to harmonize conflicting issuances, all prior rulings which are inconsistent herewith are revoked accordingly. DcIHSa Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. BIR Ruling No. DA-050-06 dated 15 February 2006; BIR Ruling No. DA-ITAD-091-03 dated 03 July 2003; BIR Ruling No. 37-89 dated 16 March 1989.