ITAD Ruling No. 173-03

November 20, 2003 ITAD RULING NO. 173-03 Sections 105, 106 (A) (5) (c), 108 (B) (3) and 109 (q), National Internal Revenue Code of 1997 BIR Ruling No. DA-ITAD 43-03 Private Enterprise Accelerated Resource Linkages 2 Suite 2103 Antel 2000 Corporate Center 121 Valero Street, Salcedo Village Makati City Attention: Mr. Edward R. Sutherland Field Manager Gentlemen : This refers to your letter dated June 2, 2003 requesting for the issuance of a value-added tax (VAT) exemption certificate in favor of the Private Enterprise Accelerated Resource Linkages 2. It is represented that on January 29, 2002, the Government of the Republic of the Philippines and the Government of Canada entered into a Memorandum of Understanding for the creation and implementation of the Private Enterprise Accelerated Resource Linkages Project 2 (Project); that the Project, which shall be implemented over a five-year, period and which shall cost the Canadian government an amount not exceeding 8,600,000 Canadian dollars, is pursuant to the objectives of the existing Philippines-Canada General Agreement on Development Cooperation (signed and entered into force on November 13, 1987); that the goal of the Project is to contribute to the reduction of poverty in the Philippines through equitable and sustainable development, and the purpose of the Project is to support the development of small and medium enterprises that create meaningful jobs for men and women alike; that the Canadian International Development Agency (CIDA), the agency appointed by the Canadian government responsible for the implementation of its undertakings under the Memorandum of Understanding, will award a contract to an entity that shall be responsible for the overall financial, administrative and technical management of the Project under the direction of the Project Steering Committee of CIDA; that for this purpose, CIDA established and awarded such contract to the Private Enterprise Accelerated Resource Linkages 2 (PEARL 2) ; that PEARL 2 shall render professional and technical services for and shall monitor and evaluate the developments of the Project; and that the Board of Investments of the Department of Trade and Industry, the agency appointed by the Philippine government for the Project, shall provide technical and administrative inputs to PEARL 2 for the effective implementation of the Project. Based on the foregoing, you now request for a ruling to the effect that the goods and services purchased by PEARL 2 necessary for the effective implementation of the Project are exempt from VAT. 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 exempt from VAT or subject to zero percent VAT goods and services sold to persons and entities whose tax treatment under special laws or international agreements to which the Philippines is a signatory necessarily exempts or effectively subjects to zero percent such goods and services sold to them. Under Articles IV and V of the Philippines-Canada General Agreement Development Cooperation and Section 5.02 of the Memorandum of Understanding establishing and implementing the Project, both being international agreements to which the Philippines is a signatory, it states that: "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, 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. . . " "Section 5.02 The proceeds of the contribution will not be used by the Philippines 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 or services purchased or acquired for, or related to, the execution of the Project." Taken altogether, the abovequoted provisions provide that 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 on goods and services purchased necessary for the effective implementation of the Project. Thus, in keeping with the intention of provisions, PEARL 2 , the Canadian firm responsible for the overall financial, administrative and technical management of the Project, shall be exempt from taxed (namely, VAT and excise taxes) imposed on goods and services it purchased relevant to the Project. (BIR Ruling No. DA-ITAD 43-03 dated March 6, 2003) aTADcH Thus 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, (SGD.) MILAGROS V. REGALADO Assistant Commissioner, Legal Service