ITAD BIR Ruling No. 187-12

May 4, 2012 ITAD BIR RULING NO. 187-12 Sections 106 (A) (2) (c) and 108 (B) (3), Tax Code of 1997; IFC Articles of Agreement International Finance Corporation 11 Floor, Tower One Ayala Triangle, Ayala Avenue 1226 Makati City Attention: Mr. Jesse O. Ang Resident Representative Philippines Gentlemen : This refers to your letter dated September 22, 2008 requesting reconsideration of BIR Ruling No. DA-ITAD-102-07 dated October 24, 2007 ("ITAD ruling") insofar as its holds that the local purchases of property by the International Finance Corporation ("IFC") are exempt from value-added tax ("VAT") (and not subject to VAT at zero percent) while the local purchases of services by IFC are subject to VAT. It is represented that IFC is an international organization established in 1956 by its member countries to further economic growth in its developing member-countries by promoting private sector development; that IFC is a member of the World Bank Group and maintains its headquarters at 2121 Pennsylvania Avenue N.W., Washington D.C. 20433, United States of America and has 179 member-countries; that Republic Act No. 1604 (An Act Authorizing Philippine Membership in the Proposed International Finance Corporation and Authorizing the Appropriation of Funds Therefor) authorized the membership of the Republic of the Philippines in IFC and its accession to the IFC Articles of Agreement in 1957; and that the Department of Foreign Affairs has since recognized the IFC's status as a fully-accredited diplomatic organization; that on March 3, 1977, the Philippine Government (through the Department of Finance) accepted the IFC's proposal to establish an operating mission in Manila which shall be afforded all the privileges and immunities of specialized agencies of the United Nations; that under Section 9, Article VI of the Articles of Agreement of the International Finance Corporation ("IFC Articles of Agreement") , IFC is granted immunity from all taxation and from all customs duties on its operations and transactions authorized under the IFC Articles of Agreement, which necessarily includes contracts for services as well as contracts to acquire or dispose of immovable and movable properties citing Sections 1, 2 and 9 of the IFC Articles of Agreement. AHTICD Moreover, it is represented that on October 24, 2007, the BIR issued the subject ITAD ruling which stated that "pursuant to the Articles of Agreement of the IFC and the UN Convention, it is clear that the properties, funds, assets, income and authorized operations and transactions of the IFC itself as an agency, are not subject to tax", but the ruling qualified the scope of the IFC's exemption from indirect taxes and concluded that pursuant to the Convention on the Privileges and Immunities of the Specialized Agencies of the United Nations ("UN Convention") , the sale of goods to IFC is exempt from VAT while the sale of services to IFC is subject to VAT; that in the said ITAD Ruling, it was confirmed that specialized agencies under the UN Convention enjoy exemption from (a) direct taxes and (b) indirect taxes on their property, but that however, specialized agencies are not exempt from indirect taxes on their purchase of services. It is now your position that the UN Convention does not limit the tax immunities granted under the IFC Articles of Agreement; and, noting that the IFC is affiliated with the International Bank for Reconstruction and Development ("IBRD"), both having created under similar structures, in BIR Ruling No. 165-89 dated August 8, 1989 and VAT Ruling No. 088-02 dated November 29, 2002, the BIR confirmed that the sales of goods and services to the IBRD are considered zero-rated on the basis of its Articles of Agreement which exempts the IBRD from all taxes on its operations and transactions. AacDHE It is further argued that under Section 4.106-5 of RR No. 16-05, as amended by RR No. 4-07, the Asian Development Bank ("ADB") is expressly cited as an example of an entity that is considered exempted from indirect taxes because Article IX, Section 34 (a) of the Agreement Between the Asian Development Bank and the Government of the Republic of the Philippines Regarding the Headquarters of the Asian Development Bank ("ADB Agreement") signed on December 22, 1966, exempts its operations and transactions from all taxation; that in BIR Ruling No. DA-ITAD-049-07 dated April 13, 2007, the BIR stated that the exemption of ADB from taxes on all its transactions is interpreted to mean that the direct sale of goods and services to ADB is effectively zero-rated under the National Internal Revenue Code of 1997 ("Tax Code of 1997") . In reply, please be informed as follows: The Bureau's position in the subject ITAD ruling insofar as it enunciates that IFC is exempt from VAT on its purchases of goods pursuant to Section 109 (K) of the Tax Code of 1997 is hereby re-stated. Clarification is however made that sales of goods by VAT-registered establishments to IFC shall be subject to zero percent (0%) rate pursuant to Section 106 (A) (2) (c) of the same Code cited below. "SEC. 106. Value-Added Tax on Sale of Goods or Properties . 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. (Underscoring and emphasis ours)" In relation to the above, there is the IFC Articles of Agreement dated April 28, 1998 which is officially recognized by the Government of the Republic of the Philippines. Its Article VI, specifically Sections 1, 2 and 9 thereof provides, viz. : "Article VI Status, Immunities and Privileges Section 1. Purposes of Article. To enable the corporation to fulfill the functions with which it is entrusted, the status, immunities and privileges set forth in this Article shall be accorded to the corporation in the territories of each member. Section 2. Status of the Corporation. The Corporation shall possess full juridical personality and, in particular, the capacity: (i) to contract; (ii) to acquire and dispose of immovable and movable property; (iii) to institute legal proceedings. xxx xxx xxx Section 9. Immunities from Taxation. (a) The Corporation, its assets, property, income and its operations and transactions authorized by this Agreement, shall be immune from taxation and from all customs duties. The Corporation shall also be immune from liability for the collection or payment of any tax or duty. . . ." (Emphasis supplied) Pursuant to the above IFC Articles of Agreement, the authorized operations and transactions of IFC are immune from taxation. Considering that IFC has full juridical personality and capacity to enter into contracts, it is hereby understood that the term "authorized operations and transactions" includes purchase of goods as well as services. Accordingly, the purchase of goods and services of the IFC is immune from taxation. Worth mentioning is the fact that the aforequoted provision of the IFC Articles of Agreement is similarly worded with Article IX, Section 34 1 of the ADB Headquarters Agreement and Article 56 (1) 2 of the "Agreement Establishing the Asian Development Bank" ("ADB Charter") , which agreements both serve as the legal basis for the VAT exemption privilege accorded to the ADB. SaETCI Pursuant to the provisions of the aforementioned ADB charter and agreement, several rulings 3 had been issued by the BIR confirming ADB's exemption from VAT on its purchases of goods and services in relation ADB's authorized/official operations and transactions in the Philippines. Such is further confirmed under Section 4.106-5 4 of RR No. 4-2007 dated February 07, 2007 (Amending Certain Provisions of Revenue Regulations No. 16-2005, As Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations of 2005) . The said grant of tax exemption is interpreted to mean that the direct sale of goods and services to ADB is effectively zero-rated under the aforementioned provisions of the Tax Code of 1997. Since the ADB Agreement is similarly worded as the IFC Articles of Agreement and considering further that the immunity of ADB has already been characterized by the Bureau of Internal Revenue as to include exemption from both direct and indirect taxes, this Office is of the opinion that IFC's exemption from taxes covers direct and indirect taxes. Further thereto, Section 108 (B) (3) of the Tax Code, as amended, provides, viz. : "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; (Underscoring and emphasis ours)" Hence, the sale of services by VAT-registered entities to IFC, a VAT exempt entity, is subject to VAT at zero percent (0%) rate pursuant to Section 108 (B) (3) of the Tax Code of 1997, in relation to Section 109 (K) of the same Code and Section 9, Article VI of the IFC Articles of Agreement. However, it should be made clear that such VAT exemption privilege applies only to the organization itself the IFC, and does not extend to its individual staff/officials. cSEDTC This ruling modifies BIR Ruling No. DA-ITAD-102-07 dated October 24, 2007 and 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. "Article IX PROPERTY OF THE BANK AND TAXATION xxx xxx xxx Section 34 The Bank, its property and its operations and transactions shall be exempt from: (a) all taxation and any obligation for the payment, withholding or collection of any tax or duty. The Bank will not claim exemption from taxes or charges which are no more than payments for public utility services; . . ." (Emphasis ours) 2. "Article 56 EXEMPTION FROM TAXATION I. The Bank, its assets, property, income and its operations and transactions, shall be exempt from all taxation and from all customs duties. The Bank shall also be exempt from any obligation for the payment, withholding or collection of any tax or duty. . . ." 3. BIR Ruling Nos. ITAD-049-07 dated April 13, 2007 and ITAD-096-00 dated August 02, 2000; VAT Ruling No. 033-00 dated September 08, 2000. 4. "SEC. 4.106-5. Zero-Rated Sales of Goods or Properties. . . . . The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: . . . (c) Sales to Persons or Entities Deemed Tax-exempt Under Special Law or International Agreement. Sale of goods or property to persons or entities who are tax-exempt under special laws or international agreements to which the Philippines is a signatory, such as, Asian Development Bank (ADB) , International Rice Research Institute (IRRI), etc., shall be effectively subject to VAT at zero-rate." (Underscoring supplied)