ITAD BIR Ruling No. 238-15

July 27, 2015 ITAD BIR RULING NO. 238-15 Sections 106 (A) (2) (c) & 149 1997 NIRC, as amended; Sections 11 & 12, Article IV Host Agreement between the Philippines and WHO World Health Organization (WHO) Regional Office for the Western Pacific United Nations Avenue P.O. Box 2932, 1000 Manila Attention: Mr. Shin Young-soo, MD, Ph.D. Regional Director Gentlemen : This refers to your May 30, 2014 letter referred to this Office by the Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting exemption from value-added tax (VAT) on the purchase of a second-hand motor vehicle for personal use of Mr. Jung Sub Yeom, Technical Officer (Environmental Health) of the World Health Organization ("WHO") from Mr. Min Kyu Kang, also of the World Health Organization ("WHO"), specifically described as follows: TCAScE Make Model Chassis Number Engine Number Plate Year Number Honda CRV 2008 MRHRE48408P020740 K24Z1-2806509 27369 Documents show that a deed of sale over the above-described motor vehicle was executed by and between Mr. Min Kyu Kang, as Seller, and Mr. Jung Sub Yeom, as Buyer, on December 3, 2013 in Manila for personal use of the latter; and that the WHO now requests necessary assistance and support from the DOF to facilitate the transfer of registration of the subject vehicle under the buyer's name. In reply, please be informed that the sale of goods in the Philippines is subject to VAT pursuant to Section 106 (A) of the amended 1997 National Internal Revenue Code ("NIRC"), as amended, thus: "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%) 1 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 transferors: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, 1 raise the rate of value-added tax to twelve percent (12%), . . ." However, under Section 106 (A) (2) (c) and 109 (1) (K) of the NIRC, certain transactions are subject to value-added tax ("VAT") at zero percent rate or exempt from VAT 2 (where in either case no output VAT is shifted or passed-on to the buyer, transferee or lessee of the goods, properties or services) if they are treated as such under special laws or international agreements to which the Philippines is a signatory, thus: cTDaEH "SEC. 106. Value-Added Tax on Sale of Goods or Properties. (A) . . . (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." "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." With respect to an international agreement, there is the Host Agreement between the Republic of the Philippines and the World Health Organization. 3 Sections 11 and 12, Article IV thereof provide: "Article IV Property, Funds and Assets xxx xxx xxx Section 11 The Organization, its assets, income and other property shall be: (a) exempt from all direct and indirect taxes. It is understood, however, that the Organization will not claim exemption from taxes which are, in fact, no more than charges for public utility services; (b) exempt from customs duties, prohibitions and restrictions on imports and exports in respect of medical supplies, or any other goods or articles imported or exported by the Organization for its official use. It is understood, however, that such medical supplies, goods or articles, imported under such exemption will not be sold in the Republic of the Philippines except under conditions agreed with the Government of the Republic of the Philippines; (c) exempt from customs duties, prohibitions and restrictions on imports and exports in respect of their publications. cSaATC Section 12 While the Organization will not, as a general rule, in the case of minor purchases, claim exemption from excise duties, and from taxes on the movable and immovable property which form part of the price to be paid, nevertheless when the Organization is making important purchases for official use of property on which such duties and taxes have been charged or are chargeable, the Government of the Republic of the Philippines shall make appropriate administrative arrangements for the remission or return of the amount of duty or tax. (Emphasis ours) Under Sections 11 and 12 above, while WHO, as an organization is exempt from VAT, such exemption applies only to vehicles purchased under the name of WHO for its official use. Moreover, there is no provision in the above Host Agreement which accords VAT exemption to officials/officers of WHO. Thus, in the absence of any legal basis, the subject sale of a 2008 Honda CRV between two (2) non-privileged parties is subject to VAT pursuant to Section 106 of the NIRC. Moreover, said transfer of motor vehicle is subject to excise tax under Section 149 of the NIRC, viz.: SEC. 149. Automobiles. There shall be levied, assessed and collected an ad valorem tax on automobiles based on the manufacturer's or importer's selling price, net of excise and value-added tax . . . . Hence, this Office is of the opinion and so holds that the herein sale of a 2008 Honda CRV by Mr. Min Kyu Kang of the WHO to Mr. Jung Sub Yeom, Technical Officer (Environmental Health), WHO, for the latter's personal use, is subject both to VAT and excise tax, pursuant to Sections 11 and 12, Article VI of the Host Agreement in relation to Sections 106 (2) (c) and 149 of the NIRC. Please be guided accordingly. cHDAIS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. The VAT rate was increased to 12 percent on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006. 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." "SEC. 4.108-5. Zero-Rated Sale of Services. (a) In general. A zero-rated sale of service (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 or properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with these Regulations." "SEC. 4.109-1. VAT-Exempt Transactions. (A) In general. VAT-exempt transactions refer to the sale of goods or properties and/or services and the use or lease of properties that is not subject to VAT (output tax) and the seller is not allowed any tax credit of VAT (input tax) on purchases. The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT." 3. Approved by the World Health Assembly on May 21, 1952 and by the Government of the Philippines on August 22, 1952. The Agreement entered into force on September 29, 1952.