ITAD Ruling No. 042-03

March 5, 2003 ITAD RULING NO. 042-03 Article 5 & 7, Paragraph 1 (a) of the GADC between GRP and GOA; Section 106 (A) (2) (c) of the Tax Code of 1997 BIR Ruling No. DA-ITAD No. 219-02; 14-03 Philippines-Australian Basic Education Assistance for Mindanao (BEAM) Torres Street Davao City Gentlemen : This refers to your letter dated October 21, 2002 endorsed to this Office by the Department of Foreign Affairs (DFA), requesting for tax-free local purchases of one (1) unit of 2002 Mitsubishi Pajero GLS 4X2 A/T and one (1) unit Mitsubishi L200 Strada 4X4 M/T, for the official use of the Philippines-Australian Basic Education Assistance for Mindanao (BEAM), specifically described as follows: Type of use: Official use Organization: Philippines-Australian Basic Education Assistance for Mindanao Make: One (1) Mitsubishi Pajero GLS 4X2 A/T One (1) Mitsubishi L200 Strada 4X4 M/T In reply, please be informed that Article 5, paragraphs 1 & 2 of the General Agreement on Development Cooperation (GADC) between the Government of the Republic of the Philippines (GRP) and the Government of Australia (GOA) provides, viz: " Article 5 " Subsidiary arrangement "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: (Emphasis supplied) "(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; "xxx xxx xxx" Relative thereto, Article 7, paragraph 1(a) of the GADC between GRP and GOA, pertinently provides as follows: " 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 In addition, Section 106 (A)(2)(c) of the National Internal Revenue Code of 1997 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. "xxx xxx xxx "(2) [Zero-rated Sales] 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. "xxx xxx xxx" Based on the abovequoted provisions, the terms of the GADC, unless otherwise stated, shall apply to subsidiary arrangements with specific reference to said Agreement. Moreover, Article 7 of the GADC states that the Government of the Philippines 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 whether to be imported from outside or procured within the Philippines. Such being the case, this Office is of the opinion and so holds that since BEAM 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 BEAM 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 14-03 dated January 27, 2003) Thus, the local purchases of BEAM of one (1) unit of 2002 Mitsubishi Pajero GLS 4X2 A/T and one (1) unit Mitsubishi L200 Strada 4X4 M/T, for its official use is subject to zero rate for purposes of VAT pursuant to Section 109(q) of the Tax Code of 1997 in relation to Article 7 of the GADC. This ruling is issued on the basis of 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 party is concerned. Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service