ITAD BIR Ruling No. 297-12

July 26, 2012 ITAD BIR RULING NO. 297-12 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-238-11 International Rice Research Institute UPLB Compound College Los Baos, Laguna Attention: Mr. Norman Macdonald Deputy Director General for Management Services Gentlemen : This refers to your letter dated 25 May 2012, 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 official purchase by the International Rice Research Institute (IRRI) of motor vehicles, specifically described as follows: Make Model Color Engine/Motor Chassis Year Number Number 1. Toyota Corolla Altis 2012 Thermalyte 1ZR-X186127 MR053REE104134771 1.6V A/T 2. Toyota Corolla Altis 2012 Thermalyte 1ZR-X187435 MR053REE104135132 1.6V A/T 3. Toyota Corolla Altis 2012 Beige 1ZR-X186911 MR053REE104134962 1.6V A/T Metallic 4. Toyota Innova 2.0G 2012 Thermalyte 1TR-7282303 TGN40-5055644 Gas A/T 5. Toyota Innova 2.0G 2012 Bronze Mica 1TR-7283343 TGN40-5055659 Gas A/T Metallic 6. Toyota Innova 2.0G 2012 Thermalyte 1TR-7284359 TGN40-5055665 Gas A/T 7. Toyota Innova 2.0G 2012 Black 1TR-7284341 TGN40-5055662 Gas A/T 8. Toyota Hi-Ace GL 2012 Silver 2KD-5756335 JTFRS13P300024736 Grandia-4D 2.5 GL Metallic M/T 9. Toyota Hi-Ace 2012 White 2KD-5703680 JTFJS02P605013760 Commuter Van 2.5L D-4D M/T 10. Hino FG8J Truck J08EUG12506 FG8J12974 Chassis mounted with Dump Truck In reply, please be informed that Section 106 (A) (2) (c) of the National Internal Revenue Code (NIRC) of 1997, as amended, provides, viz. : "SEC. 106. Value-added Tax on Sale of Goods or n Properties. aCSTDc (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 Secretary of Foreign Affairs Alberto G. Romulo, for the Republic of the Philippines and Dr. Robert S. Zeigler, Director-General of IRRI on 24 April 2006, concurred in by the Philippine Senate in a resolution 1 adopted on 28 April 2008 and which entered into force on 14 May 2008. Its Article IV, paragraph 5, Section 4.5.1 provides: ARTICLE IV IMMUNITIES AND PRIVILEGES 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. (underscoring 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, 15 December 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." (underscoring supplied) The above revenue regulations specifically recognizes IRRI as a tax-exempt entity under an international agreement and specifically subjects the sale of goods or property to it as effectively subject to VAT at zero-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: AEcTaS "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: ..." (underscoring supplied) 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 local purchase of the ten (10) units of motor vehicle described above, for the official use of the IRRI, is confirmed to be a valid tax-free purchase pursuant 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 direct 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 International Rice Research Institute 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 28 April 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, 08 June 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 22 January 2008. n Note from the Publisher: Written as "of" in the original document.