ITAD Ruling No. 197-03

December 30, 2003 ITAD RULING NO. 197-03 Sections 105, 106 (A) (5) (c), 108 (B) (3) and 109 (q), National Internal Revenue Code of 1997; BIR Ruling No. DA-ITAD 173-03 Philippines-Canada Cooperation Office 3 3rd Floor, JMT Building ADB Avenue, Ortigas Center Pasig City Attention: Mrs. Elsa Baysic-Sumido General Manager Gentlemen : This refers to your letter dated December 8, 2003 requesting for the issuance of a value-added tax (VAT) exemption ruling in favor of the Philippines-Canada Cooperation Office 3 . It is represented that on September 24, 2003, 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 Philippines-Canada Cooperation Office Project, Phase 3 (Project) ;that the Project ,which shall cost the Canadian government an amount not exceeding 4,000,000 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 establish in the Philippines a cost-effective and efficient mechanism for providing in-country professional consulting services, and for providing administrative and logistical support services to the Canadian International Development Agency (CIDA) in the planning, implementation and monitoring of its programs in the Philippines; that 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 a local executing agency that shall be responsible for the overall financial, administrative and technical management of the Project ;that for this purpose, CIDA established and awarded such contract to the Philippines-Canada Cooperation Office III (PCCO 3) ;that PCCO 3 will provide CIDA professional, administrative and logistical services which shall assist the latter's office in Manila and its headquarter abroad in planning, implementing and assessing CIDA's programs in the Philippines; and that, on the other hand, the National Economic and Development Authority (NEDA),the agency appointed by the Philippine government for the Project ,shall ensure the participation of organizations and human resources required in the realization of the Project objectives and of other requirements related thereto. Based on the foregoing, you now request for a ruling to the effect that the goods and services purchased by PCCO 3 necessary for the effective implementation of the Project are exempt from VAT. CDcHSa 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 goods, 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 on Development Cooperation and Sections 6.01 and 6.02 of the Memorandum of Understanding establishing and implementing the Project ,both being international agreements to which the Philippines is a signatory, they state 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, 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. ..." "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." HaSEcA "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." 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 those provisions, PCCO 3 ,the Canadian firm responsible for the overall financial, administrative and technical management of the Project ,shall be exempt from taxes (namely, VAT and excise taxes) imposed on goods and services it purchased relevant to the Project . (BIR Ruling No. DA-ITAD 173-03 dated November 20, 2003) 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service