ITAD BIR Ruling No. 323-12

August 28, 2012 ITAD BIR RULING NO. 323-12 Section 106 (A) (2) (c), NIRC of 1997, as amended; Articles 5 & 7 (1) (a) of the GADC between GRP and GOA; Paragraph 6 (6.2), Subsidiary Arrangement between GRP and GOA Embassy of Australia Level 23-Tower 2, RCBC Plaza 6819 Ayala Avenue, Makati City Attention: Mr. Warren Turner Team Leader Gentlemen : This has reference to your Note Verbale No. 187/12 dated May 24, 2012 indorsed to us by the Department of Foreign Affairs and the Department of Finance, requesting for the exemption from payment of value-added tax (VAT) on the local purchase of two (2) units 2012 Mitsubishi Adventure, hereunder described, for official use of the Philippines-Australia Public Financial Management Program (PFMP),a bilateral program funded by the Australian Agency for International Development (AusAID). Mitsubishi Adventure GLX Mitsubishi Adventure GLX Make DSL M/T SE DSL M/T SE Model Year 2012 2012 Frame Number PAEVB5MMCCB005850 PAEVB5MMCCB005845 Engine Number 4D56AAF8115 4D56AAF8111 Color Orion Black Dominic Silver Documents submitted show that a General Agreement on Development Cooperation (GADC) was entered into by and between the Government of Australia (GOA) and the Government of the Republic of the Philippines (GRP) which was signed on October 28, 1994 and entered into force on March 12, 1998; that pursuant to the said GADC, a Subsidiary Arrangement was thereafter entered into by GRP and GOA on September 15, 2011 for the creation and implementation of the PFMP; that the over-all goal of PFMP is the improvement in the efficiency, accountability and transparency of public fund use in the Philippines to enable better service delivery; and that PFMP will assist the GRP to implement its Philippine Public Financial Management Reform Roadmap. DAEcIS In reply, please be informed that Section 106 (A) (2) (c) of the National Internal Revenue Code of 1997 (NIRC of 1997), as amended provides, viz. : "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." In this connection, paragraphs 1 and 2 of Article 5 of the GADC between the GOA and the GRP, provides, viz. : "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. 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, Article 7 (1) (a) and (3) of the said GADC pertinently provides, viz. : "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; xxx xxx xxx 3. The disposal of vehicles provided for activities executed under this 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. (Underscoring supplied)" AacCIT 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) of the GADC states that the 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 import duties, VAT and other taxes imposed in the Philippines. It is worthy to note that the abovementioned PFMP was created by virtue of a Subsidiary Arrangement between GRP and GOA concluded on September 15, 2011 pursuant to the aforequoted Article 5 of the GADC. Its paragraph 6 provides, viz. : "6. PROGRAM SUPPLIES, MOTOR VEHICLES AND PROFESSIONAL AND TECHNICAL MATERIAL AND SERVICES xxx xxx xxx 6.2. In respect of supplies, motor vehicles and professional and technical material and services required by the Program, whether imported into or procured within the Philippines, the GOP will: (a) coordinate with concerned agencies in the exemption of Expanded Value Added Tax (EVAT) and other duties and taxes imposed in the Philippines, and be responsible for inspection fees, storage charges and all other levies, fees and charges levied in the Philippines. xxx xxx xxx" In view of all of the foregoing, this Office is of the opinion and so holds that since PFMP 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 PFMP are subject to VAT at zero percent rate while direct importations of goods are exempt VAT and other taxes imposed by Philippine tax authorities. Accordingly, this Office hereby confirms that the local purchase of two (2) units 2012 Mitsubishi Adventure M/T for official use by PFMP is subject to VAT at zero percent rate pursuant to Section 106 (A) (2) (C) of the NIRC of 1997, as amended, Articles 5 and 7 (1) (a) of the GADC and, in relation thereto, paragraph 6 (6.2) (a) of the Subsidiary Arrangement on the creation of PFMP. 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