ITAD BIR Ruling No. 303-13

November 7, 2013 ITAD BIR RULING NO. 303-13 PH-Australia General Agreement on Development and Cooperation Department of the Interior and Local Government Francisco Gold Condominium II, EDSA Corner Mapagmahal St., Diliman, Quezon City Attention: Mr. Austere Panadero Undersecretary of Local Government Gentlemen : This refers to your letter dated 22 February 2013 requesting for confirmation that the provincial road rehabilitation and maintenance projects of the Department of the Interior and Local Government ("DILG") under the Philippines-Australia Provincial Road Management Facility ("PRMF") funded by the Australian Government through the Agency for International Development ("AusAid") are exempt from Value-Added Tax (VAT). DcTAIH It is represented that the Government of the Republic of the Philippines and the Government of Australia signed a General Agreement on Development Cooperation ("GADC") which came into force on 12 March 1998. Subsequently, the parties entered into a Subsidiary Arrangement on 27 March 2009 to guide the implementation of PRMF. The goal of PRMF is to "increase economic activities and improve public access to infrastructure and services in the southern Philippines" 1 by "(a) rehabilitating and maintaining a core road network in the 10 selected provinces, and (b) through strengthening provincial government systems". 2 It is represented that the PRMF was initially implemented by Coffey International Development Pty. Ltd. ("CID") ,an Australian firm acting as the Facility Managing Contractor (FMC) from September 2009 to September 2012 in partnership with DILG. In October 2012, AusAID took over the implementation of PRMF from CID. It is further represented that since AusAID as PRMF administrator cannot use the GOP procurement system under republic Act No. 9184 in the procurement of contractors for the physical works, the DILG has agreed to be the Procuring Entity for the physical works projects funded by the program until a new FMC has been engaged to manage PRMF, or until the procuring entity authority has been delegated to the ten PRMF provincial government partners. This agreement between AusAID and DILG was formalized through an Exchange of Letter/Amendment to the Subsidiary Arrangement dated 18 February 2013. In reply, please be informed that Section 106 (A) (2) (c) of the National Internal Revenue Code of 1997, as amended (NIRC of 1997) provides: "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." cIADTC Section 2.1.1 of DILG Memorandum Circular No. 14, Series of 2013 dated 22 February 2013 provides: "2.1.1 DILG as Procuring Entity The DILG will be responsible for the process and outcomes of procurement for works contracts in PRMF. For this purpose, the DILG hereby creates a Special Bids and Awards Committee (SBAC) at the Regional Offices where the PRMF is being implemented. As Procuring Entity, one of the main tasks of the DILG shall be to manage the bidding process for works projects, specifically from Pre-procurement activities to issuance of Notice to Proceed." As a general rule, all sales of goods or services to the government, including government agencies such as the DILG, shall be subject to the five percent (5%) withholding VAT. The government shall, before making payment on account of purchases of goods or services subject to the 12% VAT shall deduct and withhold a final VAT due at the rate of 5% of the gross payment. Section 114 (C) of the NIRC of 1997 provides: " Section 114. Return and Payment of Value-Added Tax . (C) 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 services which are subject to the 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: Provided, That the payment for lease or use of properties or property rights to nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For purposes of this Section, the payor or person in control of the payment shall be considered as withholding agent." (Emphasis supplied) In this connection, paragraphs 1 and 2 of Article 5 of the GADC between the Government of Australia and the Government of the Philippines provide: "Article 5 Subsidiary arrangements 1. In support of the objectives 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. aITDAE 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, paragraph 1 (a) and paragraph 3, Article 7 of the said GADC pertinently provide: "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;" DTIaCS 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 Government of the Republic of the Philippines ("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 VAT and other taxes imposed in the Philippines. It is worthy to note that the abovementioned PRMF was created by virtue of a Subsidiary Arrangement between the Government of the Republic of the Philippines and the Government of Australia pursuant to the GADC. Such being the case, this Office is of the opinion and so holds that since PRMF 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 to PRMF are subject to VAT at zero percent rate while direct importation of goods are exempt from VAT and other taxes. In view of the foregoing, this Office hereby confirms that all program supplies, professional and technical materials and services provided for or procured for the implementation of the activities under the PRMF, are subject to VAT at zero percent rate , while direct importation of goods is exempt from VAT and other taxes pursuant to Section 106 (A) (2) (c) of the NIRC of 1997 in relation to Article 7 of the GADC. 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. TIESCA Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Section 1: Statement of Policy, DILG Memorandum Circular No. 14, Series of 2013. 2. Ibid.