ITAD Ruling No. 059-05

June 17, 2005 ITAD RULING NO. 059-05 Sections 105, 106, 108 and 109 of the National Internal Revenue Code of 1997; Articles IV & V of the Resolution No. 35; BIR Ruling No. DA-ITAD-173-03; BIR Ruling No. DA-ITAD-145-04 Philippines-Canada Cooperation Office 9th Floor, Salcedo Towers 169 H.V. dela Costa Street Salcedo Village Makati City Gentlemen : This has reference to your letter dated May 11, 2005 requesting for the issuance of a value-added tax (VAT) exemption certificate for the Canadian International Development Agency (CIDA) project called "Local Governance Support Program in the Autonomous Region in Muslim Mindanao" (LGSPA Project). It is represented that on February 3, 2005, the Government of the Republic of the Philippines and the Government of Canada entered into a Memorandum of Understanding (MOU) concerning the LGSPA Project, a subsidiary arrangement made pursuant to the General Agreement on Development Cooperation between the Government of the Republic of the Philippines (GOP) and the Government of Canada (GOC) dated November 13, 1987; that the goal of the Project is to assist the GOP and the Regional Government of the Autonomous Region in Muslim Mindanao (ARMM) in their efforts to achieve poverty reduction and sustainable peace and development in ARMM through excellence in local governance; and that the five-year project, which shall cost the Canadian government an amount not exceeding Cnd $18,000,000.00 shall be carried out by a Canadian firm, the Agriteam Canada Consulting Ltd. in association with the Federation of Canadian Municipalities. In support of your request, you cited Article IV and V of the General Agreement on Development Cooperation (GADC) between the GOP and the GOC in relation to the MOU for the LGSPA as legal basis for the issuance of the VAT exemption certificate in connection with the LGSPA Project of CIDA. In reply, please be informed that Section 105 of the National Internal Revenue Code of 1997 (Tax Code), provides that any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods, shall be subject to the 10 percent VAT. Being an indirect tax, the VAT may be shifted or passed on by the person concerned to the buyer, transferee, or lessee of the properties, or services. However, Sections 106(A)(5)(c), 108(B)(3) and 109(q) of the Tax Code either exempts from VAT or subjects to zero percent VAT, the goods and services sold to persons and entities whose tax treatment under special laws or international agreements to which the Philippines is a signatory exempts or effectively subjects to zero percent such goods and services sold to them. In this regard, Articles IV and V of the Philippines-Canada General Agreement Development Cooperation which is an international agreement to which the Philippines is a signatory, and Section 5.02, Article 5 of the Memorandum of Understanding implementing the LGSPA Project provide: Philippines-Canada General Agreement Development Cooperation : "Article IV" "The Government of the Republic of the Philippines shall ensure that development aid funds provided under any subsidiary arrangement are not used to pay any taxes, fees, customs duties or any other levies and charges imposed directly or indirectly by the Government of the Republic of the Philippines, on any goods, materials, equipment, vehicles and services purchased or acquired for the execution of any project being carried out in the Philippines pursuant to a subsidiary arrangement." "Article V" "The Government of the Republic of the Philippines shall exempt Canadian firms and Canadian personnel from or bear the costs of customs and excise duties, sales taxes, fees (except those associated with private motor vehicles), and other charges imposed by the Government of the Republic of the Philippines of similar nature, on all goods, materials, equipment, vehicles and services and on any other goods or services acquired in or imported into the Philippines for or related to the execution of projects established under any subsidiary arrangement. Resale of goods, materials, equipment or vehicles acquired under this section to a firm or person other than a Canadian firm or Canadian personnel or other exempt buyer will be subject to normal taxes and duties as provided for by the existing laws of the Philippines." Memorandum of Understanding : "Section 5.02" "Canada's contribution cannot be used to pay any taxes, fees, customs duties or any other levies or charges imposed directly or indirectly by the PHILIPPINES or the ARMM REGIONAL GOVERNMENT on any goods, materials, equipment, vehicles and services purchased or acquired to meet project requirements or in relation to the implementation of the Project." Taken altogether, the above-quoted provisions provide that the Philippine government shall ensure that the development aid funds allocated by the Canadian government for the LGSPA Project (Project) shall not be utilized in paying taxes for the purchase of goods and services which are necessary for the effective implementation of the said Project. Thus, this Office is of the opinion and so holds that in keeping with the intention of the aforecited provisions, the Agriteam Canada Consulting Ltd., a Canadian firm, which shall carry-out the provisions of the MOU for the Project, shall be exempt from taxes, (i.e. VAT) imposed on the purchase of goods and services, relevant to the implementation of the said Project. (BIR Ruling No. 65-98 dated May 21, 1998, BIR Ruling No. DA-ITAD-173-03 dated November 20, 2003 and BIR Ruling No. DA-ITAD 145-04 dated December 17, 2004) CTDHSE 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service