ITAD Ruling No. 014-03

January 27, 2003 ITAD RULING NO. 014-03 Sec. 109 (q), Tax Code of 1997 Art. 7 (1) (a), General Agreement on Development Cooperation Art. 9.1 Memorandum of Subsidiary Agreement DA-ITAD 219-02 Philippines-Australia Governance Facility (PAGF) Unit 1702 Equitable Bank Tower 8751 Paseo de Roxas, Makati City Attention: Dr. Ross Worthington Facility Director Gentlemen : This refers to your request for the issuance of a value-added tax exemption ruling pertaining to the AusAID-funded projects of Phil-Australia Governance Facility (PAGF) and the Indorsement dated September 11, 2002 by the National Economic and Development Authority to the Department of Finance regarding the matter. Records show that the Government of the Philippines (GOP) and the Government of Australia (GOA) executed the General Agreement on Development Cooperation (GADC) to strengthen existing cordial relations and foster cooperation between the two countries in conformity with the socio-economic development programs of the Government of the Philippines; that by virtue of Article 5 of the GADC, the two countries concluded a memorandum of subsidiary arrangement relating to PAGF; that PAGF is a project of the Australian Embassy under the Australian Agency for International Development (AusAID) designed to improve the efficiency and effectiveness of Philippine government policies, programs and projects within the guidelines of the Philippines Country Program Strategy. In reply, please be informed that Section 109(q) of the Tax Code of 1997 provides: "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; xxx xxx xxx" Article 7 of the GADC provides: "Article 7 Project supplies and professional and technical material and services "1. In respect of project supplies and professional and technical material and service 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 "2. .... "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. Subject to the foregoing provisions, Section 9.1 of the PAGF Memorandum of Subsidiary Arrangement provides: "9. Facility Supplies, Motor vehicles and Professional and Technical Material And Services "9.1. In respect of supplies, motor vehicles and professional and technical material and services provided by the GOA, whether, imported into or procured within the Philippines, the GOP will : (a) coordinate with concerned agencies in the exemption of and/or be responsible for the payment of import duties, Value Added Tax (VAT) 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" Based on the above-quoted provisions, Article 7 of GADC provides that the Government of the Philippines shall: 1) 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 whether to be imported from outside or procured within the Philippines; and 2) exempt direct importation of goods from import duties, VAT and other taxes imposed in the Philippines. Moreover, Section 9.1 of the PAGF Memorandum of Subsidiary Arrangement provides that, "in respect of ...,motor vehicles, ...,whether imported into or procured within the Philippines, the Government of the Philippines will coordinate with concerned agencies, in this case the BIR, in the exemption of and/or responsible for the payment of import duties, VAT and other duties and taxes imposed in the Philippines .... Such being the case, this Office is of the opinion and so holds that since PAGF is a subsidiary arrangement of GADC, an international agreement to which the Philippines is a signatory, then direct supplies of domestic goods and services of PAGF are subject to zero rate for purposes of VAT in respect of supplies, motor vehicles and professional and technical material and services provided by the Government of Australia while direct importations of goods are exempt from VAT. (DA-ITAD 219-02 dated December 23, 2002) IHEaAc 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 considered without force and effect insofar as the herein party is concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service