ITAD BIR Ruling No. 209-15

June 23, 2015 ITAD BIR RULING NO. 209-15 Philippines-Australia General Agreement on Development Cooperation Embassy of Australia Level 23-Tower 2 RCBC Plaza 6819 Ayala Avenue, Makati City, 1200 Attention: Mark Taylor Team Leader Australia-Asia Program to Combat Trafficking in Persons Gentlemen : This refers to note verbale dated October 3, 2014 requesting confirmation that purchases of program supplies, professional and technical materials and services made by Cardno Emerging Markets (Australia) Pty. Ltd. (Cardno) pursuant to the Subsidiary Arrangement between the Government of the Philippines (GOP) and the Government of Australia (GOA) for the implementation of the Australia-Asia Program to Combat Trafficking in Persons (AAPTIP) Program are subject to exemption/zero percent value-added tax ("VAT") pursuant to the Philippines-Australia General Agreement on Development Cooperation ("GADC"). CAacTH It is represented that the GOP and GOA signed GADC on the 28th of October 1994 in Sydney, Australia, to strengthen the existing cordial relations between the two governments and to foster development cooperation between the Philippines and Australia. Under the GADC, the GOP and GOA or their agencies, statutory authorities or organizations may conclude subsidiary arrangements in respect of specific activities. It is further represented that pursuant to Art. 5 of the GADC, the GOP through the Department of Justice (DOJ) and the GOA through the Department of Foreign Affairs and Trade (DFAT) signed on the 3rd day of July 2014 a subsidiary arrangement relating to the AAPTIP Program. AAPTIP aims to reduce the incentives and opportunities for trafficking of persons in the ASEAN region. It focuses on the prosecution pillar of anti-trafficking at the national and regional level. Support will be provided to the ASEAN Secretariat ('ASEC'), and the target countries including the Philippines. It will strengthen the criminal justice response to trafficking by: enhancing regional and national investigative and judicial cooperation on trafficking cases; strengthening legislative frameworks; providing adequate support for victims and witnesses; and expanding the evidence base for policy development and decision-making. It will be implemented over five years from 2013-2018. It is also agreed in the subsidiary arrangement that AAPTIP will be implemented by the Contractor known as the Implementing Service Provider or ISP, selected by GOA, through DFAT as the coordinating authority. GOA will ensure AAPTIP is actually resourced and that its progress is monitored as an integral part of administering the ISP's contract. It is also represented that on 26 July 2013, GOA, as represented by the Australian Agency for International Development (AusAID) , contracted the services of Cardno as the ISP for the AAPTIP; that Cardno is a professional infrastructure and environmental services company, with expertise in the development and improvement of physical and social infrastructure for communities around the world. As the ISP for AAPTIP, Cardno's primary responsibility is to provide high quality capacity development outputs that directly contribute to helping participating member states like the Philippines to meet the ASEAN's established standards for criminal justice system responses to trafficking; that Cardno is responsible for implementing AAPTIP in a manner that achieves its objectives and outputs and provides information for monitoring its progress; that the activity management responsibilities of Cardno includes, among others, the procurement of all necessary goods and services; and that finally, GOA, acting through Cardno , will provide the following materials, services and equipment to support the execution of AAPTIP: IAETDc a) A Management Support and Technical Advisory Team ('MSTAT') comprising of regional long-term and short-term advisers, and long-term country office personnel to provide technical advice and support. b) Programming funds for the implementation of Annual Work Plans; c) Training and workshop events; d) A flexible programming fund; e) Research grants; f) Activity administration costs; g) Activity offices equipment and materials; and h) Equipment and vehicles for Activity personnel. It is also represented that subject to the terms of Articles 7-10 of GADC, the GOP will provide, among others, exemption of project supplies and professional and technical materials and services from import duties and other taxes. Based on the above representation, you now seek confirmation of the zero percent and exemption on VAT on purchases of goods and services by Cardno for the implementation of AAPTIP provided under Section 1, Article 7 of the GADC. In reply, please be informed that Section 114 (C) of the National Internal Revenue Code of 1997, as amended ("Tax Code") provides for the general rule that sale of goods and services to government or any of its agencies are subject to the final withholding VAT of five percent (5%), to wit: "SEC. 114. Return and Payment of Value-Added Tax. xxx xxx xxx (A) Withholding of Value-added Tax. The government or any of its political subdivisions, instrumentalities or agencies including government-owned or controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and/or of services which are subject to value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold a final value-added tax at the rate of five percent (5%) of the gross payment thereof. . . For purposes of this Section, the payor or person in control of the payment shall be considered as the withholding agent. . ." DcHSEa However, Section 106 (2) (c) of the Tax Code states that 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. Also, Section 109 (1) (K) of the same code exempts from VAT certain transactions which are exempt under international agreements to which the Philippines is a signatory, viz. : 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, 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) Zero-rated Sales 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 to zero rate. SEC. 109. Exempt Transactions. (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax. SCaITA 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 relation to the foregoing, paragraph 1 (a), Article 7 of the GADC provides that the Philippine Government shall subject to zero percent VAT, the direct supplies of domestic goods and services and also shall exempt direct importation of goods from VAT with respect to projects carried out in the Philippines pursuant to the GADC, 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;" (Underscoring supplied) Further, Art. 3 (d) of the GADC defines project supplies and professional and technical material and services, also the terms Australian personnel and Australian institutions, firms and organizations as follows: aTHCSE "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; b) "Australian personnel" means Australian nationals or permanent residents or other persons who are not nationals or permanent residents of the Philippines who are working in the Philippines on an activity under this Agreement and whose salaries or other costs are funded from the contribution of the Government of Australia to the activity; xxx xxx xxx d) "Professional and technical material" means equipment and other goods imported by members of the Australian personnel or Australian institutions, firms and organizations for their professional use while engaged in an activity under this Agreement and paid for from funds provided by the Government of Australia; e) "Project supplies" means equipment, material and other goods supplied for the execution of development activities under this Agreement, the cost of which is funded from the contribution of the Government of Australia to the activity." f) "Services" means services performed by individuals or by general partnerships registered in the Philippines; xxx xxx xxx" Moreover, under Article 5 (1) of the GADC, the GOP and GOA may conclude subsidiary arrangements in respect of specific activities. Art. 5 (1) of the GADC provides: "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." cAaDHT Based on the foregoing provisions, project supplies procured within the Philippines for the implementation of an activity funded by GOA in relation to the GADC shall be subject to zero percent VAT while services will be subject to zero percent VAT only when rendered by individuals or general professional partnerships registered in the Philippines. On the other hand, professional and technical materials will be exempted from VAT only when it is imported by Australian personnel or Australian institutions, firms and organizations, as defined above, for their professional use while engaged in an activity under the GADC and paid for from funds provided by the GOA. These privileges, in turn, extend to subsidiary arrangement which will be concluded between GOP and GOA in respect of specific activities. Accordingly, since Cardno , an Australian firm, was subcontracted by GOA through AusAID to implement AAPTIP, a program created and funded by GOA by virtue of the subsidiary arrangement between GOA and GOP pursuant to the GADC, this Office is of the opinion and so holds that the direct purchases of goods and services of individuals or general professional partnerships registered in the Philippines by Cardno , are subject to zero percent (0%) VAT while the direct importation of professional and technical materials by Cardno is exempted from VAT pursuant to paragraph 1 (a), Article 7 of the GADC. 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. HCaDIS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue