ITAD BIR Ruling No. 194-11

July 12, 2011 ITAD BIR RULING NO. 194-11 Secs. 106, 108 and 109, National Internal Revenue Code of 1997, as amended; Articles 5 & 7, General Agreement on Development Cooperation between the Government of Australia and the Government of the Republic of the Philippines; BIR Ruling No. DA-ITAD-039-09; BIR Ruling No. DA-ITAD-042-09; BIR Ruling No. ITAD 103-05 Coffey International Development 33rd Richmond Road Keswick SA 5035 Australia Attention: Mr. Michael Sadlon Manager Contracts & Technical Services Gentlemen : This has reference to your letter dated February 2, 2011, requesting for the confirmation of your opinion that direct local supplies of domestic goods and services, as well as direct importation of goods, to Coffey International Development Pty., Ltd. ("CID") , in its role as Managing Contractor of the Philippines-Australia Human Resource and Organisational Development Facility ("PAHRODF" or "Facility" ), are subject to zero percent (0%) VAT rate. It is represented that the Government of the Republic of the Philippines ("GRP") and the Government of Australia ("GOA") entered into a General Agreement on Development Cooperation between the Government of Australia and the Government of the Republic of the Philippines ("GADC") , which came into force on March 12, 1998; that a Subsidiary Arrangement was thereafter entered into by GRP and GOA on September 23, 2010 for the creation and implementation of the PAHRODF; that GOA designated the Australian Agency for International Development ("AusAID") as its implementing agency under the Subsidiary Agreement; that on September 24, 2010, GOA, represented by AusAID , and CID entered into a Head Contract pursuant to which CID was appointed the sole Managing Contractor of PAHRODF. It is further represented that the goal of the five-year Facility (2010-2015) is to enhance the effectiveness of selected programs and reform agenda under the Australia-Philippines Development Assistance Strategy ("DAS"); that PAHRODF will also manage Australia Awards programs such as the Australian Development Scholarships ("ADS") and the Australian Leadership Awards ("ALA"); that the total contribution of GOA in respect of the Facility are estimated to be up to A$65 million over five years of the Facility and will cover the implementation, management, and monitoring of PAHRODF and related activities which will be undertaken by CID as the sole Managing Contractor. SDHCac In reply, please be informed that Sections 106 (A) (2) (c), 108 (A), (B) (3) and 109 (1) (K) of the National Internal Revenue Code (NIRC) of 1997, as amended provide, viz. : "Section 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, a 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: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve-percent (12%), . . . 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. xxx xxx xxx SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve-percent (12%), . . . 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; cHaCAS 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; xxx xxx xxx" In this connection, paragraphs 1 and 2 of Article 5 of the GADC between GOA and GRP state: "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. 2. Subsidiary arrangements shall make specific reference to this Agreement and the terms of this Agreement shall, unless otherwise stated, apply to such subsidiary arrangements. Wherever possible, such subsidiary arrangements shall set out: (a) the name and duration of the activity; (b) a description of the activity and statement of its objectives; (c) the nominated implementing agencies in both countries; (d) potential benefits of the activity; (e) details of the contributions to the activity by the two Governments and other donors including: (i) financial contributions; (ii) materials, services and equipment to be supplied; (iii) the numbers and areas of expertise of Australian, Filipino and other personnel to be engaged; and (iv) estimated annual budgets; (f) arrangements for management and control, including those for reporting; (g) timetable for implementation; and (h) procedures for evaluation and review. xxx xxx xxx" Furthermore, Article 7, paragraph 1 (a) of the said GADC pertinently 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;" xxx xxx xxx 3. The disposal of vehicle provided for activities executed under the Agreement shall be the subject of discussions between the two Governments and shall take into account the transport requirements of other activities assisted by the Government of Australia under the Program of development cooperation." Based on the above-quoted provisions, the terms of the GADC, unless otherwise stated, shall apply to subsidiary arrangements making specific reference to said Agreement. Moreover, Article 7 (1) (a) and (3) of the GADC state that the GRP shall subject to zero rate, for purposes of VAT, direct supplies of domestic goods and services in respect of project supplies and professional and technical material and services including vehicles. Furthermore, GRP shall exempt direct importation of goods from import duties, VAT and other taxes imposed in the Philippines. Significantly, PAHRODF was created by virtue of a Subsidiary Arrangement between the Government of the Republic of the Philippines and the Government of Australia concluded on September 24, 2010 pursuant to the aforequoted Article 5 of the GADC. Such being the case, this Office is of the opinion and so holds that since PAHRODF was created by virtue of a subsidiary arrangement concluded pursuant to the provisions of the GADC, an international agreement to which the Philippines is a signatory, then direct supplies of domestic goods and services provided by the Government of Australia to PAHRODF are subject to VAT at zero percent rate while direct importations of goods are exempt from import duties, VAT and other taxes imposed by Philippine tax authorities. This privilege, however, is limited only to PAHRODF and cannot be claimed directly by CID regardless of its designation as the managing contractor. TAacIE Incidentally, the Head Contract between AusAID and CID itself provides that CID shall be responsible for the payment of taxes imposed in connection with the preparation, execution and carrying into effect of the Head Contract including stamp tax. Section 12 of the Head Contract provides in part: "12. GOVERNMENT TAXES, DUTIES AND CHARGES 12.1 Except to the extent referred to in this clause and Standard Conditions Clause 21 (Goods and Services Tax), 1 each Party must bear and is responsible for its own costs in connection with the preparation, execution, and carrying into effect of the Contract. 12.2 Except where the Contract, the Treaty between Australia and the Partner Country or the Subsidiary Agreement provides otherwise, all taxes : (a) imposed or levied in Australia or overseas during the term of the Contract in connection with the performance of the Contract; and (b) which are not already included in the Fees payable by AusAID under the Contract, must be paid by the Contractor . 12.3 The Contractor must bear and is responsible for all stamp duty and other fees, whether levied in Australia or in the Partner Country , or in respect of: (a) the Contract, the Project, and any sub-contractors entered into for the performance of the Services; (b) the sale, purchase, lease, assignment, licence or transfer of any property under the Contract; (c) the obtaining of any approvals, consents or authorizations in respect of the Project; and (d) any instrument or transaction contemplated by or necessary to give effect to the Contract. . . ." 2 In view of the foregoing, the privilege under the GADC of being subject to VAT at zero percent on the direct supplies of domestic goods and services and the exemption from import duties with regards to the direct importations of goods cannot be invoked by CID. (BIR Ruling ITAD No. 103-05 dated September 19, 2005; BIR Ruling DA-ITAD No. 039-09 dated March 23, 2009; and BIR Ruling DA-ITAD No. 042-09 dated April 3, 2009) This ruling is issued on the basis of facts represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein party is concerned. SEHTIc Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Standard Conditions Clause 21 states, among others, that AusAID shall pay CID any amount payable by the latter under the GST (Goods and Services Tax) legislation of Australia provided that certain conditions are complied with. 2. Emphasis and underscoring supplied.