ITAD BIR Ruling No. 175-12

April 24, 2012 ITAD BIR RULING NO. 175-12 Articles 3 (Definitions), 5 (Subsidiary Arrangements) and 7 (Project Supplies and Professional and Technical Material and Services); Philippines-Australia Agreement on Development Cooperation; BIR Ruling No. ITAD 111-12 Australian Embassy Level 23, Tower 2, RCBC Plaza 6819 Ayala Avenue Makati City Gentlemen : This refers to your Note Verbale No. 383/11 dated November 11, 2011 requesting for a ruling exempting from value-added tax ("VAT") the sale of the following motor vehicles by Honda Car Philippines, Inc. ("Honda Car Philippines") 1 to the Philippines-Australia Public Financial Management Program ("Program") under separate Pro Forma Invoices dated October 26, 2011, to wit: First Unit Second Unit Model 2011 Honda CR-V 2.0V 2011 Honda CR-V 2.4S Automatic Transmission Automatic Transmission Frame No. MRHRE1830BP010325 MRHRE4840BP030136 Engine No. R20A15800865 K24Z15801877 Color Urban Titanium Polished Metal As a background, the Program was created on September 15, 2011 under the Subsidiary Arrangement between the Government of the Republic of the Philippines and the Government of Australia Relating to the Philippines-Australia Public Financial Management Program , particularly between the Department of Budget and Management ("DBM") and the Australia Agency for International Development ("AusAID") . The Arrangement was concluded 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") . The goal of the Program is the improvement in the efficiency, accountability and transparency of public fund use in the Philippines to enable better service delivery. The Program will assist the Philippine Government to implement its Philippines Public Financial Management Reform Roadmap. The direction, decisions and activities under the Program are guided by the following objectives: ETIDaH Objective 1 : Increase the efficiency and effectiveness of the allocation, utilization and reporting of budgeted funds by oversight agencies. Objective 2 : Improve public financial management in select departments to enable more efficient utilization and accountability of public funds for service delivery. Objective 3 : Generate more timely, reliable and accessible public expenditure management information. Objective 4 : Strengthen external oversight of public expenditure management linked to physical performance information. The contribution of the Australian Government to the Program is up to 30 million Australian dollars. AusAID will directly manage the Program and contract a suitably qualified Service Provider to carry out the administration of the Program. In reply, please be informed that under Section 106 (A) (2) (c) of the National Internal Revenue Code of 1997, as amended, 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, 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." DHETIS Relative thereto, please be informed that under paragraph 1 (a), Article 7 of the Philippines-Australia Agreement on Development Cooperation Agreement, the Philippine Government shall subject to zero percent VAT, the direct supplies of domestic goods and services to projects carried out in the Philippines pursuant to the Agreement, 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;" Under paragraph 1, Article 5 of the Agreement and subparagraph (a), Article 3 of the Agreement, these projects are those pursuant to subsidiary arrangements between the Philippine and Australian Governments, and under subparagraph (a), Article 3 thereof, these projects may be carried out by Australian institutions, firms or organizations engaged in a development activity under the Agreement, to wit: "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." ASTcaE "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 Program is created under a subsidiary arrangement between the Philippine and the Australian Governments, and will be managed by AusAid, an Australian institution, the sale of the subject two units of motor vehicles by Honda Cars Philippines to the Program shall be subject to VAT at zero percent, 2 pursuant to paragraph 1 (a), Article 7 of the Philippines-Australia Agreement on Development Cooperation. (BIR Ruling No. ITAD 111-12 dated March 1, 2012) 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 Footnotes 1. Head office and plant situated at 105 South Main Avenue, Laguna Technopark, Santa Rosa, Laguna, Philippines. 2. Revenue Regulations No. 16-2005 (Consolidated Value-Added Tax Regulations of 2005) , as amended, provides: "SEC. 4.106-5. Zero-Rated Sales of Goods or Properties. A zero-rated sale of goods or properties (by a VAT-registered person) is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods, properties or services related to such zero-rated sale, shall be available as tax credit or refund in accordance with these Regulations."