ITAD Ruling No. 068-04

July 8, 2004 ITAD RULING NO. 068-04 Article 5 & 7, Paragraph 1 (a) of the GADC between GRP and GOA: Section 106 (A) (2) (c) of the National Internal Revenue Code of 1997 DA-ITAD Ruling No. 160-03 Philippines-Australia Quality Technical Vocational Education and Training Project Phase II (PAQTVET II) 6/F TESDA Complex, East Service Road South Superhighway, Taguig, M.M. Gentlemen : This refers to your letter dated March 8, 2004 indorsed to this Office by the Department of Foreign Affairs (DFA), requesting exemption from payment of ad valorem and value-added taxes (VAT) on the local purchase of a motor vehicle for the official use of the Philippines-Australia Quality "Technical Vocational Education and Training Project Phase II (PAQTVET II), specifically described as follows: Make: One (1) Nissan Patrol Station Wagon 4x4 AT Model Year: 2003 Type of use: Official use Organization: Philippines-Australia Quality Technical Vocational Education and Training Project Phase II Frame No.: TB45-062906 Engine No.: TGNSLHAY61-Y12521 In reply, please be informed that Section 106 (A)(2)(c) of the National Internal Revenue Code of 1997 (NIRC) 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" Moreover, 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 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: (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" 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, since PAQTVET II is a subsidiary arrangement of GADC and falls within the purview of Section 106 (A)(2)(c) of the NIRC, and which exemption under an international agreement ( i.e. , GADC) to which the Philippines is a signatory effectively subjects such sales to zero rate, this Office is of the opinion and so holds that the purchase of one (1) unit of Nissan Patrol Station Wagon 4X4 AT, for PAQTVET II's official use shall be subject to VAT at zero percent (0%) rate. However, considering that exemption from taxes other than VAT applies only to direct importation of goods, your request for exemption from the payment of the ad valorem tax for the above purchases is hereby denied for lack of legal basis. ASHaDT Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service