ITAD Ruling No. 069-05

July 13, 2005 ITAD RULING NO. 069-05 Articles 5 & 7, Paragraph 1 (a) of the GADC between GRP and GOA; Sections 108 (B) (3) & 106 (A) (2) (c) of the Tax Code of 1997; BIR Ruling No. DA-ITAD No. 219-02; 14-03 Philippines-Australia Community Assistance Program (PACAP) Unit 2309 Prestige Tower Condominium Emerald Avenue, Ortigas Pasig City Gentlemen : This has reference to your Note Verbale No. 092/05 dated March 17, 2005 endorsed to this Office by the Department of Foreign Affairs (DFA),Office of Protocol and the Department of Finance (DOF),requesting for tax-free local purchases of two (2) motor vehicles, for the official use of the Philippines-Australia Community Assistance Program (PACAP),specifically described as follows: Type of use: Official use Organization: Philippines-Australia Community Assistance Program (PACAP) Make: one (1) RANGER 4X2 XL MT Model Year: 2005 Color: Nifty Red Engine Number: W9AT138033 Chassis Number: MNCBSFD804W371670 and Make: one (1) FORD EVEREST XLT 4X4 MT (2.5 Turbo Intercooler Diesel Engine) Model Year: 2005 Color: Cool White Engine Number: WLAT-564260 Chassis Number: MNCLS4D405W111982 In reply, please be informed that Section 106 (A)(2)(c) and Section 108(B)(3) 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. SEIcAD "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" "Section 108. Value-added Tax on Sale of Services and Use or Lease of Properties . "xxx xxx xxx" "(B) Transactions Subject to Zero Percent (0%) Rate . The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: "xxx xxx xxx" "(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate; "xxx xxx xxx" In connection thereto, Article 5, paragraphs 1 and 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) dated October 28, 1994 and entered into force on March 12, 1998 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; ScHADI "(d) potential benefits of the activity; "xxx xxx xxx" Moreover, Article 7, paragraph 1(a) of the above-mentioned 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" "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 GOA under the program of development cooperation." Based on the abovequoted provisions, the terms of the GADC, unless otherwise stated, shall apply to subsidiary arrangements with specific reference thereto. Article 7 of the GADC states that GRP shall subject to zero percent rate, for purposes of VAT, direct supplies of domestic goods and services in respect of project supplies and professional and technical material and services for the execution of development activities under the GADC, while it shall exempt direct importation of goods from import duties, VAT and other taxes imposed in the Philippines (or pay such duties thereon).Moreover, paragraph 3 of the same Article 7 provides for the disposal of vehicles acquired for the activities executed under the GADC. Relative thereto, a Subsidiary Arrangement (SA) between the GRP and the GOA relating to the Philippines-Australia Community Assistance Program (PACAP) was concluded pursuant to and subject to the provisions of the GADC on August 20, 2004. Such being the case, this Office is of the opinion and so holds that since the Subsidiary Arrangement relating to PACAP is in accordance with the GADC between the GRP and GOA, an international agreement to which the Philippines is a signatory, then direct supplies of domestic goods and services of PACAP are subject to zero percent rate for purposes of VAT in respect of supplies, motor vehicles and professional and technical material and services provided by the GOA, while direct importations of goods are exempt from VAT. (DA-ITAD No. 14-03 dated January 27, 2003) In view of the foregoing, the local purchases of PACAP of two (2) motor vehicles, one (1) 2005 Ranger 4X2 XL MT and one (1) Ford Everest XLT 4X4 MT, herein described and for its official use are subject to VAT at zero percent rate pursuant to Sections 108(B)(3) and 106(A)(2)(c) of the NIRC in relation to Article 7 of the GADC. aESIHT As regards the seller of goods and services to PACAP, the 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 PACAP. 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 PACAP 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 PACAP 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, with the Large Taxpayer's Audit and Investigation Division II (LTAID II), if VAT-registered seller is a large taxpayer, or with the Audit Information, Tax Exemption and Incentives Division (AITEID) of this Bureau if the VAT-registered seller is a non-large taxpayer, which, when approved, shall be effective for 12 months from the date of issuance of the approval. (Revenue Memorandum Circular No. 17-96). Without prior approved application for effective zero-rating, the transaction which may otherwise be treated as 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. 4.102-2, 4.103-1 and 4.107-1(d), Revenue Regulations No. 7-95) 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service