ITAD BIR Ruling No. 202-11

July 26, 2011 ITAD BIR RULING NO. 202-11 Section 106 and Section 109, National Internal Revenue Code of 1997, as amended; Section 5, Revenue Regulations No. 4-2007; Headquarters Agreement Between the Government of the Republic of the Philippines and the International Rice Research Institute; BIR Ruling No. ITAD-17-09 International Rice Research Institute UPLB Compound College Los Baos, Laguna Attention: Mr. Norman Macdonald Treasurer and Director for Management Services Gentlemen : This refers to your letter dated May 26, 2011, forwarded to this Office by the Department of Foreign Affairs and the Department of Finance, requesting for a value-added tax (VAT) exemption ruling on the locally purchased forty-two (42) motor vehicles for the official use of the International Rice Research Institute (IRRI) pursuant to the Headquarters Agreement between the Republic of the Philippines and the IRRI, specifically described as follows: Make Model Color Engine/Motor Chassis Number Year Number 1 Dump truck 6-wheel 2009 ARC white 243531 PABNPR66PL5201572 2 Hyundai Grand Starex 2011 Hyper Metallic D4BHB003163 KMJWA37HABU334838 GLS 2.7 A/T/Van 3 Hyundai Grand Starex 2011 Black D4CBA715382 KMJWA37JBBU293499 GLS 2.7 A/T/Van 4 Toyota Corolla Altis 2011 Thermalyte 1ZR-X025051 MR053REE104102642 1.6 G A/T 5 Toyota Corolla Altis 2011 Thermalyte 1ZR-X022081 MR053REE104102097 1.6 G A/T 6 Toyota Corolla Altis 2011 Thermalyte 1ZR-X014731 MR053REE104100124 1.6 G A/T 7 Toyota Corolla Altis 2011 Thermalyte 1ZR-X023835 MR053REE104102319 1.6 G A/T 8 Toyota Corolla Altis 2011 Thermalyte 1ZR-X041251 MR053REE104105825 1.6 G A/T 9 Toyota Corolla Altis 2011 Thermalyte 1ZR-X037995 MR053REE104105174 1.6 G A/T 10 Toyota Corolla Altis 2011 Medium Silver 1ZR-X042022 MR053REE104106051 1.6 G A/T Metallic 11 Toyota Corolla Altis 2011 Medium Silver 1ZR-X043431 MR053REE104106486 1.6 G A/T Metallic 12 Toyota Corolla Altis 2011 Medium Silver 1ZR-X044483 MR053REE104106553 1.6 G A/T Metallic 13 Toyota Corolla Altis 2011 Beige Metallic 1ZR-X042347 MR053REE104106124 1.6 G A/T 14 Toyota Corolla Altis 2011 Beige Metallic 1ZR-X041065 MR053REE104105797 1.6 G A/T 15 Toyota Corolla Altis 2011 Beige Metallic 1ZR-X030253 MR053REE104103674 1.6 G A/T 16 Toyota Corolla Altis 2011 Xtreme Black 1ZR-X033954 MR053REE104104347 1.6 G A/T 17 Toyota Corolla Altis 2011 Xtreme Black 1ZR-X037567 MR053REE104105058 1.6 G A/T 18 Toyota Innova G 2011 Bronze Mica 1TR-7024126 TGN40-5022532 Gas AT 2.0 4S Metallic 19 Toyota Innova G 2011 Thermalyte 1TR-7023242 TGN40-5022511 Gas AT 2.0 4S 20 Toyota Innova G 2011 Black 1TR-7023209 TGN40-5022520 Gas AT 2.0 4S 21 Toyota Innova G 2011 Thermalyte 1TR-7024092 TGN40-5022531 Gas AT 2.0 4S 22 Toyota Innova G 2011 Jade Green 1TR-7025639 TGN40-5022537 Gas AT 2.0 4S Metallic 23 Mitsubishi L300 CC 2010 Aspen White 4D56-AAE1271 PAEL35MY9AB005356 with PET Body 24 Mitsubishi L300 CC 2010 Aspen White 4D56-AAE1061 PAEL35MY9AB005239 with PET Body 25 Mitsubishi L300 CC 2010 Aspen White 4D56-AAE0763 PAEL35MY9AB005143 with PET Body 26 Mitsubishi L300 CC 2010 Aspen White 4D56-AAE1572 PAEL35MY9AB005492 with PET Body 27 Mitsubishi L300 CC 2010 Aspen White 4D56-AAE1585 PAEL35MY9AB005493 with PET Body 28 Mitsubishi L300 CC 2010 Aspen White 4D56-AAE0764 PAEL35MY9AB005145 with PET Body 29 Mitsubishi L300 CC 2010 Aspen White 4D56-AAE1087 PAEL35MY9AB005237 with PET Body 30 Mitsubishi L300 CC 2010 Aspen White 4D56-AAE1076 PAEL35MY9AB005236 with PET Body 31 Mitsubishi L300 CC 2010 Aspen White 4D56-AAE1063 PAEL35MY9AB005238 with PET Body 32 Mitsubishi L300 CC 2010 Aspen White 4D56-AAE1575 PAEL35MY9AB005494 with PET Body 33 Mitsubishi L300 CC 2010 Aspen White 4D56-AAE0760 PAEL35MY9AB005144 with PET Body 34 Mitsubishi L300 CC 2010 Aspen White 4D56-AAE0767 PAEL35MY9AB005142 with PET Body 35 Ford Ranger XL 2.5L M/T 2010 Cool White WL AT1239804 MNCBSFD40AW911380 36 Ford Ranger XL 2.5L M/T 2010 Cool White WL AT1233267 MNCBSFD40AW906366 37 Ford Ranger XL 2.5L M/T 2010 Cool White WL AT1233302 MNCBSFD40AW906241 38 Ford Ranger XL 2.5L M/T 2010 Highlight Silver WL AT1233471 MNCBSFD40AW906262 39 Ford Ranger XL 2.5L M/T 2010 Highlight Silver WL AT1233516 MNCBSFD40AW906393 40 Ford Ranger XL 2.5L M/T 2010 Highlight Silver WL AT1233563 MNCBSFD40AW906426 41 Ford Ranger XL 2.5L M/T 2010 Cool White WL AT1239936 MNCBSFD40AW911261 42 Ford Ranger Trekker 2.5L 2010 Highlight Silver WL AT1230112 MNCLSFE10AW904712 TDCi A/T In reply, please be informed that Section 106 (A) (2) (c) of the National Internal Revenue Code (NIRC) of 1997, as amended, provides, viz. : acIASE "SEC. 106. Value-added Tax on Sale of Goods of Properties. (A) Rate and Base 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%), . . ." However, Section 109 (K) of the same NIRC provides, viz. : "SEC. 109. Exempt Transactions. (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from 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;" In relation thereto, we look into the "Headquarters Agreement Between the Government of the Republic of the Philippines and the International Rice Research Institute" ("Headquarters Agreement") signed by the then Secretary of Foreign Affairs Alberto G. Romulo, for the Republic of the Philippines and Dr. Robert S. Zeigler, Director-General of IRRI on April 24, 2006, concurred in by the Philippine Senate in a resolution 1 adopted on April 28, 2008 and which entered into force on May 14, 2008. Its Article IV, paragraph 5, Section 4.5.1 provides: "ARTICLE IV IMMUNITIES AND PRIVILEGES xxx xxx xxx 5. Taxation, Customs and Quarantine Section 4.5.1. The provisions of existing laws or ordinances to the contrary notwithstanding, the Institute , or its successors, shall be exempt from the payment of all taxes provided under existing laws or ordinances. This exemption shall extend to goods imported and owned by the Institute which are intended for its official use. (emphasis supplied) Based on the above, IRRI is exempt from the payment of all taxes . As to the scope of the term 'all taxes', it may be argued that in Commissioner of Internal Revenue vs. Philippine Long Distance Telephone Company, G.R. No. 140230 dated December 15, 2005 (CIR vs. PLDT) , the Supreme Court declared that the correct lesson from the case of Maceda vs. Macaraig, Jr., 2 is that ". . . an exemption from 'all taxes' excludes indirect taxes, unless the exempting statute, like NPC's charter, is so couched as to include indirect tax from exemption." Hence, it would appear that the exemption accorded to IRRI under the Headquarters Agreement covers only direct taxes, VAT not included being an indirect tax. However, Section 5 of Revenue Regulations (RR) No. 4-2007, amending Section 4.106-5 of RR No. 16-2005 provides: Section 5. Zero-Rated Sales. Sec. 4.106-5 of RR No. 16-2005 is hereby amended to read as follows: "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." (emphasis supplied) The above revenue regulations recognizes IRRI as a tax-exempt entity under an international agreement. Specifically, it effectively subjects the sale of goods or property to IRRI to VAT at zero percent (0%) rate, clearly showing that the IRRI is considered as falling under the exception contemplated under the principle enunciated in CIR vs. PLDT, ". . . unless the exempting statute . . . is so couched as to include indirect tax from exemption" . As to the ad valorem tax, Section 5 of RR 003-08 3 specifically mentions IRRI as an international organization exempt from excise tax (i.e., ad valorem) . It provides: "SECTION 5. Exemption from the Imposition of Excise Tax Upon Removal. In case of sale/delivery to embassies, legates such as the Office of the Papal Nuncio, or international organizations ( i.e. , Asian Development Bank, International Rice Research Institute , United Nations' various international organizations such as World Health Organization, UNICEF, etc.), the excisable articles may be removed from the place of production of the manufacturer without payment of the excise tax, subject to the following conditions: . . ." (emphasis supplied) aCHDAE From the above revenue regulations likewise, it is implicit that IRRI is recognized as an entity exempt from excise tax and hence cannot be made to shoulder the ad valorem tax paid by the dealer/manufacturer upon removal of the excisable goods from place of production, in this case motor vehicles. In view of all of the foregoing, this Office is of the opinion and so holds that the aforementioned purchase of 42 motor vehicles (1 unit of dump truck in 2009 and 41 units of various motor vehicles in 2010 and 2011) described in detail above, for the official use of the IRRI, is confirmed to be exempt from both VAT and ad valorem tax pursuant to Section 5 of RR 003-08 and to Section 109 (K) of the NIRC of 1997, as amended and the Headquarters Agreement Between the Government of the Republic of the Philippines and the International Rice Research Institute. The VAT exemption on the subject purchase is interpreted to mean that the sale of goods and services to IRRI is effectively zero-rated as confirmed under Section 5 of RR No. 4-2007. It is hereby understood that this exemption applies only to vehicles purchased under the name of the IRRI and for its official use. 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. Resolution No. 64 adopted by the Senate on April 28, 2008. 2. Ernesto M. Maceda vs. Hon. Catalino Macaraig, Jr., in his capacity as Executive Secretary, Office of the President, Hon. Vicente Jayme, etc., et al., G.R. No. 88291, June 8, 1993. 3. Entitled "Amending Certain Provisions of Existing Regulations on the Granting of Outright Excise Tax Exemption on Removal of Excisable Articles Intended for Export or Sale/Delivery to International Carriers or to Tax-Exempt Entities/Agencies and Prescribing the Provisions for Availing Claims for Product Replenishment" dated January 22, 2008.