ITAD Ruling No. 011-04

February 18, 2004 ITAD RULING NO. 011-04 Agreement Between the Asian Development Bank and the Government of the Republic of the Philippines Regarding the Headquarters of the Asian Development Sections 34,44 (c), and 45; Department of Finance (DOF) Order No. 43-89 dated October 13, 1989; Memorandum of the Executive Secretary of the Office of the President of the Philippines dated August 15, 1973 VAT Ruling No. 008-00 BIR Ruling No. ITAD-80-00 BIR Ruling No. ITAD-125-02 VAT Ruling No. 033-2000 Asian Development Bank 6 ADB Avenue 0401 Mandaluyong City Attention: Mohammed Parvez Imdad Head-Shipping Section, General Services Division Office of Administrative Services Gentlemen : This refers to your letter dated February 5, 2004 requesting reconfirmation of the exemption of the qualified Asian Development Bank (ADB) personnel from the payment of value-added tax (VAT). Likewise, you also seek clarification on the application/treatment of said VAT exemption by sellers of goods, and services, more particularly, the car manufacturers with respect to their sale of motor vehicles to VAT exempt ADB personnel. It is represented, that pursuant to the Department of Finance (DOF) Order No. 43-89 dated October 13, 1989 entitled "Procedure in the Availment of the 2nd Car Privilege by Qualified Asian Development Bank Personnel," and BIR Ruling No. 083-90 dated May 15, 1990, the qualified personnel of the ADB are accorded VAT exemption from the purchase of one motor vehicle from local car manufacturers. However, the Toyota Motor Philippines, Inc. only applies a 3.5% "differential rate" instead of the full 10% VAT exemption on the basis of VAT Review Committee Ruling No. 033-2000 dated September 8, 2000. In reply, and to fully clarify the tax exemption privileges and immunities of the ADB and its qualified personnel, this Office is of the opinion and so holds as follows: The Asian Development Bank Section 109 of the National Internal Revenue Code of 1997 (NIRC) provides, viz : "Sec. 109. Exempt transactions . The following shall be exempt from the value-added tax: "xxx xxx xxx" "(q) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree Nos. 66, 529 and 1590;" In this connection, Article IX, Section 34 of the Agreement Between the Asian Development Bank and the Government of the Republic of the Philippines Regarding the Headquarters of the Asian Development (RP-ADB Agreement) provides, viz : "Section 34 The Bank its property and its operations and transactions shall be exempt from: (a) all taxation and any obligation for the payment, withholding or collection of any tax or duty . The Bank will not claim exemption from taxes or charges which are no more than payments for public utility services; (emphasis supplied) (b) all customs duties and other levies on any goods, articles, including motor vehicles, spare parts and publications, imported or exported by the Bank for its official use, and any obligation for the payment, withholding or collection of any customs duties. The goods and articles, including vehicles, spare parts and publications imported under such exemption will not be sold in the Republic of the Philippines except under conditions agreed upon with the Government; and" "xxx xxx xxx" Based on the above-quoted provisions, it is clear that the properties, operations and transactions, which include but are not limited to official purchases of goods and services in the Philippines, by the ADB are accorded exemption from all taxes or duties, whether direct and indirect taxes such as VAT and ad valorem tax (AVT). Such being the case, the official purchases of goods and services by the ADB, which include official purchase of a motor vehicle, are exempt from all taxes and duties, more particularly from VAT pursuant Section 109(q) of the NIRC in relation to the RP-ADB Agreement. (BIR Ruling No. ITAD-80-00 dated July 25, 2000) Qualified Bank Personnel Pursuant to Article XII, Sections 44(c) of the RP-ADB Agreement, Governors, other Representatives of Member Countries, Directors, the President, the President, Vice President and Executive Officers, as agreed by ADB and the Philippine Government, enjoys tax exemptions, immunities, privileges and facilities enjoyed by members of diplomatic missions of comparable rank. Other Officers and staff of the ADB, including but not limited to experts and consultants, as determined by the Department of Foreign Affairs (DFA), enjoy the following tax privileges under Section 45(b)(f) and (g) of the same Agreement: (1) Exemption from taxation on or in respect of the salaries and emoluments paid by the ADB, subject to the power of the Philippine Government to tax its nationals; [ i.e. Filipinos working in the ADB are subject to tax] (2) The right to import, free of duty and other levies, prohibition and restrictions on imports, furniture and effects including one automobile within twelve (12) months after taking up their post in the Republic of the Philippines, and the same right to import one automobile for replacement three (3) years after the last importation. [Should the previously imported automobile be sold, conveyed or transferred, due notice shall be given by the ADB to the Government and delivery shall be made at the place designated by the Government in consultation with the ADB]; and (3) The right to import, free of duty and other levies, prohibitions and restrictions on imports, through the medium of the ADB, reasonable quantities of foodstuffs and other articles for personal use and consumption. In addition to the above tax privileges, the professional staff members and higher of the ADB, as determined by the DFA, are granted the right to a second tax-free purchase of one unit locally assembled motor vehicle under certain conditions pursuant to the Memorandum of the Executive Secretary of the Office of the President of the Philippines dated August 15, 1973, as reproduced hereunder: "1. In connection with the request of the Asian Development Bank that each member of its professional staff be allowed to import two (2) tax-exempt automobiles, I wish to inform you that the request is hereby approved, provided that; (i) the second car should be locally assembled drawn from those covered by the Progressive Car Manufacturing Program (PCMP) , (Emphasis supplied) (ii) with a right of rebate of taxes as if said locally assembled, cars were exported, (iii) that the exemption shall be extended only to staff members in the professional or higher level, and (iv) that the payment be made in a foreign currency acceptable as part of the international reserves of the Philippines. "2. The request by the Bank for its staff who are at higher or equivalent level to Administrative Assistant to import one (1) duty free automobile is likewise approved, subject to the four conditions cited above. In addition to the above conditions is the procedure in the availment of the "2nd car" privilege outlined under DOF Order No. 43-89 dated October 13, 1989. Moreover, the qualified ADB personnel may now choose to avail its 1st imported car privilege under 45(f) of the Agreement locally under the PCMP. Exemption in either case includes both VAT and AVT. ( BIR Ruling No. ITAD-125-02 dated July 22, 2002 ) Seller of Goods and Services under the Above Exempt Transactions As regards the seller of goods and services to ADB and its qualified personnel, it is worthy to note that sales by a VAT-registered entity of goods and services under the above circumstances shall be treated as effectively zero-rated transactions [Sec. 4.100-3, Revenue Regulations No. 7-95] In this jurisdiction, the grant of VAT exemption alone would mean that the sellers shall bear the burden of the tax if they will not be allowed to pass-on the VAT to the ADB or its personnel. To enable local sellers to refund the amount of the tax inputted into the cost of goods and services supplied to an exempt entity, VAT zero-rating is resorted to. In other words, from the point of view of the VAT-registered seller, although the sale of goods or services to ADB and its personnel is a taxable transaction for VAT purposes, the process of zero-rating operates to nullify the output tax on the part of the local supplier and the input tax on his own purchase of goods, properties or services related to such effectively zero-rated sale becomes available as tax credit or refund (VAT Ruling No. 008-00 dated February 7, 2000) Treated as effectively zero-rated transactions, the VAT-registered seller of goods or services to ADB or its qualified personnel is required to file an application and secure prior approval for zero-rating to be able to claim tax credit/refund on VAT (input tax) previously paid. The said application shall be filed, before an initial sale, to the Large Taxpayers Audit and Investigation Division II (LTAID II) of this Bureau, which, when approved, shall be effective for 12 months from the date of issuance of the approval (Revenue Memorandum Circular No. 17-96). Without an approved application for effective zero-rating, the transaction otherwise treated to be zero-rated shall be considered exempt. Consequently, failure on the part of a VAT-registered seller to secure an approval for effective zero-rating of said transaction will result in the forfeiture of his entitlement to claim tax credit/refund on the (VAT) input tax passed on to him. [Secs. 4.107-1(d), 4.102-2 and 4.103-1, Revenue Regulations 7-95] Nonetheless, such requirement prior approval for effective zero-rating supra to seller of goods and services to ADB (but not to its qualified personnel) had been dispensed with by VAT Ruling No. 33-2000 dated September 8, 2000, as the VAT ruling itself is a certification of sufficient and continuing compliance by local sellers to such requirement. For proper documentation purposes, the sellers are required to clearly stamp their VAT invoice with the notation "zero-rated sale," with reference to the number and date of the dispensing ruling. In other words, sale of goods or services to ADB (the Bank) is deemed an effectively zero-rated sale even without prior approval therefor. On the other hand, sale of goods or services to qualified ADB personnel requires a prior approved application for zero-rating in order to consider such sale to be effectively zero rated. CIAacS Accordingly, whether or not the seller had secured approval for effective zero-rating of the aforementioned transactions, the exemptions accorded to the ADB and its qualified personnel stand and may still be invoked to resist payment of the VAT. This is because even in the absence of prior approval for effective zero-rating of a given transaction, the same is still an exempt transaction which the seller is not allowed to charge any VAT (output tax) to buyer ADB or its personnel. In the event, however, that the seller, more particularly car manufacturers in this case, erroneously passed on the VAT, the ADB or its qualified personnel are entitled to claim for refund in the amount of passed on VAT. Since Toyota, in its sale to qualified ADB personnel, allowed a VAT exemption only to the extent of 3.5% which it denominates as "tax differential," then, Toyota is liable to refund the 6.5% passed on VAT to the concerned qualified ADB personnel. (VAT Ruling No. 008-00 dated February 7, 2000) This ruling is issued on the basis of the facts as 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 parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service