Resource, Environment and Economics Center for Studies, Inc.

July 15, 2008 VAT RULING NO. 006-08 National Internal Revenue Code Section 108 (A); BIR Ruling # DA-ITAD 016-05 Resource, Environment and Economics Center for Studies, Inc. Suite 405, The Tower of Emerald Square J.P. Rizal cor. P. Tuazon Blvd. Project 4 Quezon City 1109 Gentlemen : This refers to your letter dated March 31, 2006 which was referred to the VAT Review Committee on May 16, 2006 seeking clarification on the proper VAT treatment of payments received by your office as a sub-contractor of Development Alternatives, Inc. (DAI) for services rendered in the Philippines in relation to the United States Agency for International Development (USAID) Grant Project entitled, "Philippine Environmental Governance (ECOGOV)". HcDaAI In reply, please be informed as follows: 1. Background On 24 February 2005, this Bureau through its International Tax Affairs Division (ITAD) issued BIR Ruling No. DA-ITAD 16-05 addressed to Laya Mananghaya & Co. concerning the tax treatment of service fees to be paid by the USAID to DAI under the Philippines-United States of America (U.S.A.) tax treaty. In that ruling, it was represented that DAI is a foreign company organized and existing under the laws of the U.S.A. with principal office at 7250 Woodmont Avenue, Suite 200, Bethesda, Maryland 20814; and that on 27 September 2004, the USAID contracted DAI to provide technical assistance in the implementation of the Environmental Governance 2 Project. The dispositive portion of the ruling tackled not only the application of the relevant provisions of the Philippines-U.S.A. tax treaty in relation to the income tax aspect of the service fees paid by USAID to DAI but it also made a pronouncement on the VAT treatment, hereunder quoted: "xxx xxx xxx Finally, the service fees to be paid by USAID to DAI, being payments for the performance of services in the Philippines, are generally subject to 10 percent value-added tax (VAT) under Section 108 (A) of the Tax Code below: "Section 108. Value-added Tax on Sale of Services and Use or Lease of Properties . (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration . . ." STcaDI However, since VAT is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee (Section 105, Tax Code), the USAID, in this case, and not Development Alternatives, will ultimately shoulder the payment of VAT on the service fees. But in view of the existing VAT Exemption Certificate No. 2004-109 dated December 16, 2003 issued to the Embassy of the United States of America (to which the USAID is a part and is working dependently) valid until December 31, 2004 and renewable every year, the USAID cannot be obliged to shoulder the VAT on the subject service fees. Thus, the service fees to be paid by the USAID to Development Alternatives are exempt from VAT. (BIR Ruling No. DA-ITAD 14-03 dated January 27, 2003) xxx xxx xxx" 2. Discussion As discussed in the above ruling, the service fees paid to DAI are exempt from VAT basically for the benefit of USAID which will ultimately bear such tax because VAT by its nature as an indirect tax may be shifted or passed on to the buyer, transferee or lessee. And since USAID draws its VAT exemption privilege as an integral part of the Embassy of the United States of America, it may not be passed on with VAT. From your letter, you seek clarification from this Office that as service contractor of DAI to do some activities related with the USAID Grant Project ECOGOV, such rendition of service may also be considered as exempt from VAT. Under Section 108 (A) of the National Internal Revenue Code of 1997, as amended, provides: "Sec. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax . There shall be levied, assessed and collected a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale of exchange of services, including the use or lease of properties: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: ITSCED xxx xxx xxx The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration . . ." When DAI contracted Resources, Environment and Economics Center for Studies, Inc. (REECS) to do some of the work for ECOGOV project, the fees in payment of such service are subject to VAT pursuant to the afore-quoted provision. It is of no moment that the activities are related to the USAID Grant Project ECOGOV. The contract of service between DAI and REECS cannot be given the same VAT exempt treatment similar to the transaction between USAID and DAI because, in this instance, both DAI and REECS are taxable entities which entered into a transaction that is clearly subject to VAT. More so, unlike USAID, neither DAI nor REECS is enjoying VAT exemption privilege. It must be clarified that the exemption of USAID cannot be extended to DAI simply because the latter was contracted by the former to provide technical assistance in the implementation of the Environmental Governance 2 Project. Furthermore, in the afore-cited ruling, it was the VAT exemption privilege of USAID, as the Special Technical and Economic Mission implementing the 1951 Bilateral Agreement on Economic and Technical Cooperation between the Philippines and the United States of America, working dependently as part of the US mission in the Philippines, and thus, enjoying the privileges and immunities accorded to that mission, which gave rise to the exempt treatment of such service fees from VAT. DAI it is not accorded any VAT exemption privilege by reason of its contract with USAID on the ECOGOV project and, therefore, DAI's separate transaction with REECS cannot be exempted from VAT even if the activities for which REECS is contracted to perform are related to the same USAID project. In other words, the exemption attaches not to the project but to USAID as part of the US Embassy. Moreover, the payment by DAI to REECS for the latter's services cannot be considered sourced from the USAID grant fund but from DAI's own funds. Insofar as the service performed by REECS is concerned, the consumer of which is DAI and not USAID. And since DAI chooses not to perform the service itself, but opts to subcontract a portion of the scope of work to REECS; that very act of subcontracting will not by itself extend whatever tax benefit attendant to the transaction between USAID and DAI to that between DAI and REECS. 3. Conclusion Based on the above, this Bureau hereby rules that the service fees for the rendition of certain services by REECS to DAI are subject to VAT pursuant to the pertinent provisions of the National Internal Revenue Code of 1997, as amended, and its implementing rules and regulations. IDCHTE Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner