VAT Ruling No. 012-91

March 12, 1991 VAT RULING NO. 012-91 Undersecretary Ernesto S. De Castro Project Facilitation Committee Office of the President Malacaang, Manila S i r : This refers to your letter dated January 23, 1991 requesting for a confirmation that the contractors and suppliers of the Government's infrastructure projects funded by the USAID grant to the Philippine Government under the Rural Infrastructure Fund (RIF) shall be subject to zero-rate value-added tax (VAT). prll It is represented that the USAID has extended a grant to the Philippine Government under the Rural Infrastructure Fund (RIF) in the amount of $170 million. One of the components of this grant is the South Cotabato Road Project which has an allocation of $30 million. This project is now in the pre-bidding stage. The contractor for the road project will be hired directly by USAID. The grant Agreement between the Republic of the Philippines and the United States of America provides: "SEC. B.4. Taxation (a) This Agreement and the Grant will be free from any taxation or fees imposed under laws in effect in the territory of the Grantee. (b) To the extent that (1) any contractor, including any consulting firm, any personnel of such contractor financed under the Grant, and any property or transactions relating to such contracts; and 2) any commodity procurement transaction financed under the Grant are not exempt from identifiable taxes, tariffs, duties, or other levies imposed under laws in effect in the territory of the Grantee, the Grantee will, as and to the extent provided in and pursuant to Project Implementation Letters, pay or reimburse the same with funds other than those provided under the Grant." Please be informed that sales of goods and services made by a VAT-registered person "to persons or entities whose exemption under . . . international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate" are subject to zero-rate (Sections 100(a)(2) and 102(a)(3), NIRC). The proviso "effectively subjects such sales to zero rate" refers to exemptions expressly granted under an international agreement which are extended not only to the Grantee but also to its supplier of goods or services, provided such supplier is a VAT-registered person. (See Section 8(b), Revenue Regulations No. 5-87) Since under the above-quoted tax exemption provisions of the International Agreement disbursement of the Grant/Fund shall be free from taxation in the Philippines, i.e., vis-a-vis the tax otherwise due from the suppliers of goods and services, it follows, the exemption of the Grant/Fund is extended to the said suppliers. Accordingly, such suppliers of goods and services are subject to the zero-rated VAT pursuant to Sections 100(a)(2) and 102(a)(3), NIRC. Please be informed, further, that under Section 8(d) of Revenue Regulations No. 5-87 such suppliers are required to apply with the VAT Division, National Office, Quezon City, for zero-rate treatment of their sales of goods or services to herein USAID-funded project. Such application must be accompanied with a legal justification why the supplier's sale transaction is qualified for the zero-rated VAT. Accordingly, it is suggested that a copy of this letter-VAT ruling be furnished the said suppliers for their respective application purposes. Finally, please be informed that a VAT-registered supplier of goods and services is entitled to a refund of his input taxes attributable to his VAT zero-rated sale transactions, pursuant to Section 106, NIRC. This means that such supplier shall not charge 10% VAT on his sale of goods or services to the herein USAID-funded project. On the other hand, he shall be entitled to a refund or tax credit on input taxes attributable to such sales. aisadc Very truly yours, JOSE U. ONG Commissioner of Internal Revenue