ITAD Ruling No. 074-05

July 27, 2005 ITAD RULING NO. 074-05 Arts. IV & V of the Philippines-Canada General Agreement Development Cooperation in relation to Arts. VI (6.01) & (6.02) and Art. V (5.02) of' the Memorandum of Understanding of PCCO 3 and JURIS, respectively; Sections 149 & 101 (A) (3) and (B) (2) of the Tax Code of 1997; Section 3 (3) of the Revenue Regulations No. 13-98; Section 8 of Revenue Regulations No. 25-03 BIR Ruling Nos. DA-ITAD 197-03 & 145-04 BIR Ruling No. DA-301-2000 Philippines-Canada Cooperation Office 9th Floor, Salcedo Towers 169 H.V. dela Costa Street, Salcedo Village Makati City Attention: Ms. Elsa Baysic-Sumido General Manager Gentlemen : This refers to your letter dated May 4, 2005 requesting a ruling regarding the taxes due on the following transactions covering transfer of ownership, through sale or donation, of project vehicles of the Canadian International Development Agency (CIDA): 1. Donation from one CIDA project to another The Philippines-Canada Cooperation Office 3 (PCCO),a CIDA project, transferred the ownership of its Mitsubishi L-300 Van to a new CIDA project, the Justice Reform Initiative Support (JURIS) Project, known as the Judicial Reform Support Project. The van was purchased value-added tax (VAT)-free by PCCO 3. Both PCCO 3 and JURIS are covered under subsidiary agreements between the Government of Canada and the Government of the Republic of the Philippines, which state in effect that Canada's contribution cannot be used to pay for taxes, fees, customs duties or any other levies or charges imposed directly or indirectly by the Philippines on any vehicles or other goods purchased or acquired to meet project requirements or in relation to the implementation of the project. 2. Sale to a private person (non-privileged buyer) The PCCO 3 sold its Mitsubishi Spacewagon to Mr. Ferdinand A. Rivera, a non-privileged buyer. The car was purchased by PCCO also free from VAT. 3. Donation to a non-government organization (NGO) The Philippines Development Assistance Program (PDAP),a recently completed CIDA project, donated its Mitsubishi L-200 Pick-up to the Philippines Development Assistance Program Philippines, Inc.,a non-governmental organization duly registered with the Securities and Exchange Commission. AISHcD It is further represented that pursuant to the Philippines-Canada General Agreement on Development Cooperation (GADC) and the respective Memorandum of Understanding (MOU) executed between the Government of the Philippines and the Government of Canada concerning JURIS and PCCO 3 Projects, the Canadian International Development Agency (CIDA) was appointed by the Government of Canada to be responsible for the implementation and monitoring of its undertakings under said MOUs, and that the subject vehicles were locally purchased by the various CIDA projects pursuant to the GADC. In reply, please be informed as follows: 1. Article IV and V of the GADC, which is an international agreement to which the Philippines is a signatory, in relation to the MOUs, namely: (a) Sections 6.01 and 6.02 of Article VI of the MOU establishing and implementing the PCCO 3 1 and (b) Section 5.02 of Article V of the MOU establishing and implementing the JURIS, 2 state: GADC: "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." (Emphasis supplied.) "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. ..." (Underscoring supplied.) MOU for PCCO 3 : "ARTICLE VI "Section 6.01 The Philippines shall exempt the Project from import duties, customs tariffs and all other duties, charges or levies on technical and professional equipment for use by the Project." "Section 6.02 Funds, equipment, products, materials and any other goods acquired for, or related to, the execution of the Project shall not be subject to any taxes, import duties, customs tariffs, inspections or storage charges or any other levies, duties, fees or charges." CaAIES MOU for JURIS: "ARTICLE V "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 on any goods, materials, equipment, vehicles and services purchased or acquired to meet project requirements or in relation to the implementation of the Project." Based on the foregoing the Philippine government shall ensure that development aid funds allocated by the Canadian government for the Project shall not be utilized in paying for taxes, directly or indirectly imposed on goods and services purchased which are necessary for the effective implementation of the Projects. 2. As to the donation from one CIDA Project to another Donor's tax is a direct tax imposed upon the transfer by any person, resident or nonresident, of a property by gift. In view of the aforecited provisions and considering the fact that PCCO 3 is a Canadian firm as confirmed by BIR Ruling No. DA-ITAD 197-03 dated December 30, 2003, and that the donation of PCCO 3 of its Mitsubishi L-300 in favor of JURIS in relation to the implementation of the latter's project as cited in Article V, Section 5.02 of the MOU, this Office is of the opinion and so holds that such transfer of ownership over the Mitsubishi L-300 Van shall be exempted from tax, specifically, donor's tax. 3. Sale to a private person (non-privileged buyer) In the case of the second transaction, Revenue Regulations No. 25-2003 3 provides: "Section 8. Tax treatment on Subsequent Sale, Transfer or Exchange of Tax-Exempt Automobile by a Tax-Exempt Person/Entity to a Non-Exempt Person/Entity . In cases where a tax-exempt person/entity acquired an automobile, whether locally purchased or imported, without payment of the tax by reason of his/their exemption, the purchase thereof by a non-exempt person/entity shall be subjected to the ad valorem tax based on the higher of (i) actual consideration between the tax-exempt person/entity and the non-exempt person/entity; or (ii) the depreciated value of the automobile at the time of sale, transfer, or exchange which depreciation rate shall be at ten percent (10%) per year, but in no case shall the total amount of depreciation be more than fifty percent (50%) of the original cost or value. However, in case where the automobile was acquired by the tax-exempt person or entity prior to but sold after the effectivity of the Act, the computation of the ad valorem tax shall be governed by the Act. Where a tax-exempt automobile subsequently sold, transferred or exchanged by a tax-exempt person or entity was determined to be originally acquired by such person or entity primarily for the purpose of avoiding the payment of the excise tax, shall be computed based on the original purchase price or value of importation of such motor vehicle at the time of its original purchase or importation by such tax-exempt person or entity without the benefit of any deduction for depreciation otherwise allowed under existing rules and regulations." CEaDAc Thus, the sale made by PCCO 3 of the Mitsubishi Spacewagon in favor of Mr. Ferdinand A. Rivera, a non-privileged buyer, is subject to ad valorem tax based on the higher of (i) actual consideration between the tax-exempt person/entity; or (ii) the depreciated value of the automobile at the time of sale, transfer, or exchange which depreciation rate shall be at ten percent (10%) per year, but in no case shall the total amount of depreciation be more than fifty percent (50%) of the original cost or value. 4. Donation to a non-governmental organization Lastly, the donation made by the Philippines Development Assistance Program (PDAP), a CIDA project, of the Mitsubishi L-200 Pick-up in favor of Philippines Development Assistance Program Philippines, Inc. (PDAPPI), a non-government organization duly registered with Securities and Exchange Commission, shall be exempt from donor's tax provided that all the conditions set forth under Section 101(A)(3) and (B)(2) as implemented by Section 3(3) of Revenue Regulations No. 13-98 4 are complied with, quoted as follows: "Section 3. Donations to Accredited Non-stock, Non-Profit Corporations/NGOs . Donations to accredited non-stock, non profit corporations/NGOs shall be entitled to the following benefits: xxx xxx xxx (3) Exemption from Donor's Tax Donations and gifts made in favor of the accredited non-stock, non-profit corporations/NGOs shall be exempt from donor's tax: Provided, however, That not more than thirty percent (30%) of the said donations and gifts for the taxable year shall be used by such accredited non stock, non-profit corporations/NGOs institutions qualified-donee institution for administration purposes pursuant to the provisions of Section 101 (A)(3) and (B)(2) of the Tax Code. "xxx xxx xxx." In view of the foregoing, donations and gifts made in favor of accredited non-stock, non-profit corporation/NGO shall be exempt from donor's tax provided that not more than 30% of the said donations and gifts for the taxable year shall be used by such accredited non-stock, non-profit corporations/NGOs, for administration purposes pursuant to the provision of Section 101(A)(3) and (B)(2) of the Tax Code of 1997. However, donors claiming exemption from donor's tax on their donations and contributions to accredited non-stock, non-profit corporations/NGO should submit evidences or proofs showing the amount of donation, if in cash; if in real property, the fair market value or the zonal value thereof at the time of donation, whichever is higher; and if personal property, the acquisition cost thereof, but if said personal property had already been used at the time of donation, the depreciated or book value thereof. (BIR Ruling No. DA-301-2000 dated August 11, 2000) 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 Footnotes 1. Memorandum of Understanding Between the Government of Canada and the Government of the Philippines concerning the Philippines-Canada Cooperation Office Project, Phase III. 2. Memorandum of Understanding Between the Government of Canada and the Government of the Philippines concerning Judicial Reform Support Project. 3. Amended Revenue Regulations Governing the Imposition of Excise Tax on Automobiles pursuant to the Provisions of Republic Act No. 9224, An Act Rationalizing the Excise Tax on Automobiles, Amending for the Purpose the National Internal Revenue Code of 1997, and For Other Purposes. 4. Implementing Republic Act No. 8424, "An Act amending the National Internal Revenue Code, as amended" Specifically Section 34 (14) Relative to the Deductibility of Contributions or Gifts Actually Paid or Made to Accredited Donee Institutions in Computing Taxable Income.