VAT Ruling No. 007-02

March 4, 2002 VAT RULING NO. 007-02 105, 106 (A) (2), 108 (B) (3) 109 (q) VAT Ruling 023-00 Partido Development Administration PDA Complex, Caraycayon, Tigaon, Camarines Sur Attention: Renato Z. San Jose Acting, Administrator S i r : This refers to your letter dated September 10, 2001 requesting for a zero-rated value added tax for the labor, materials and equipment to be supplied to Partido Development Administration by Kruger Partido Water Consortium in connection with the construction of the Partido Water Supply System Project (PWSSP). It is represented that Partido Development Administration (PDA for brevity) is a government corporate body (or GOCC) created under Republic Act No. 7820, as amended by R.A. No. 8989, which covers the ten municipalities of the 3rd Congressional District of Camarines Sur. PDA's capitalization and the funds necessary to carry out its mandate are charged against the member-municipalities, local as well as foreign grants/finances, and income from its operations; That one of your major project is the implementation of the PWSSP which aims to construct eight potable water systems to service the ten municipalities of PDA at very socially affordable rates; That in connection with the said construction labor, materials and equipment will be purchased from here and abroad; That the total peso value of VAT from the said purchases will amount to P41,275,363.58, of which, P27,064,163 represents the peso value of VAT from local purchases. It was further represented that last November 1999, PDA was able to secure a mixed credit facility from the Danish International Development Assistance (DANIDA), acting on behalf of the Kingdom of Denmark, for the implementation of the PWSSP. The said loan agreement, however, provides that: "All payments by the Borrower under this Loan Agreement shall be made free and clear and without deduction for or on account of any Taxes (other than the Lender's net income tax) imposed by the Republic of the Philippines to the extent that the Borrower is required by law to make payment subject to any taxes. If any taxes or amounts in respect of Tax must be deducted or any other deductions must be made from any amounts payable or paid by the Borrower, or payable or paid by the Lender under this Loan Agreement, the Borrower shall pay such additional amounts as will result in the Lender receiving a net amount equal to the full amount which it would have received had payment not been made subject to Tax or other deductions. The Borrower shall indemnify the Lender on first demand against all documented costs and expenses, including stamp duty, if any, incurred now or in the future in connection with the drafting, and execution of this Loan Agreement." That in addition to the above Loan Agreement provision, you further represent that PDA is exempt from VAT under paragraph 4 of Section 13 of R.A. 7820 which states that: "The loans, credits, and indebtedness and the payment of the principal, interest and other charges thereon, as well as the importation of machinery, equipment, materials and supplies by the Administration, paid in form of the proceeds of any loan, credit or indebtedness incurred under this Act shall be exempt from all taxes, fees, imposts, other charges, and restrictions imposed by the Republic of the Philippines, or any of its agencies and political subdivisions" . That if PDA cannot secure a zero-rated VAT for the labor, material and equipment to be supplied in relation to the implementation of the PWSSP, it will have to assume the tax obligations accruing from the implementation of the project. Hence this request for the zero rating of the PWSSP. In reply, please be informed that the above issues have already been settled in BIR VAT Ruling No. 23-00 dated July 20, 2000. In the said opinion, this office ruled that: ". . . all the importation of machinery, equipment, materials and supplies by PDA paid from the proceeds of the loan incurred under R.A. 7820 for the execution of its Partido Water Supply System Project shall be exempt from VAT. However, if the foreign loan agreement as approved by the President of the Philippines, as well as the contracts involving the availment of or utilization of the proceeds of the loans provide for exemption of taxes, the sale of goods and services to the PDA by local suppliers in connection with the said project may legally be considered VAT exempt or effectively zero-rated, as the case may be." Moreover, in connection with the taxability of the goods purchased from the proceeds of your foreign loan agreement, please be informed that your loan agreement with DANIDA does not come with the purview of Section 4-A of R.A. 4860, since the said loan merely exempts the payments to your creditor and not the proceeds of the loan, from the payment of taxes. Section 4-A of R.A. No. 4860 otherwise known as the "Foreign Borrowing Act" clearly provides that: "Upon the recommendation of the Secretary of Finance, in consultation with the National Economic and Development Authority (NEDA) and approval of the President of the Philippines, loan agreement, as well as contracts involving the availment of or utilization of the proceeds of the loans, credits or indebtedness obtained under the provisions of this Act, may provide for the exemption from taxes, charges, or other levies." (Emphasis supplied.) In view thereof, we reiterate our previous stand in VAT Ruling No. 023-00, that only your importation of machinery, equipment, materials and supplies paid from the proceeds of the foreign loan incurred under R.A. 7820 for the execution of Partido Water Supply System Project shall be exempt from VAT, while the sales of goods and services of local suppliers to PDA shall be subject to VAT. Hence, PDA should shoulder the peso value of VAT amounting to P27,064,163.00 from its purchase of local goods and services. This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, it will be discovered that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group