VAT Ruling No. 016-02

March 14, 2002 VAT RULING NO. 016-02 Sec 106 (A) (2) (b) VAT Ruling 021-00 Atty. Wencito F. Yap, CPA 3/F Gonzaga Building 414 Rizal Avenue, Sta. Cruz Manila S i r : This refers to your letter dated March 15, 2000 requesting on behalf of your client, Helm Pharmaceuticals Gmbh, a non-resident foreign corporation, for a ruling to the effect that the grant extended by the Government of Germany to the Government of the Philippines partakes the nature of an executive agreement, hence, its purchase of certain pharmaceutical products manufactured or assembled in the Philippines for delivery to a resident of the Philippines using the funds of the grant is effectively subject to zero percent (0%) VAT as provided for under Section 106(A)(2)(c) of the Tax Code of 1997. It is represented that the Government of Germany extended to the Philippine Government a grant denominated in Deutsche mark for certain accredited projects; that pursuant to the grant, the Kreditanstalt fur Wiederaufbau (KFW),a German government-owned financial institution and is tasked with dispensing the aid funds, conducted a bidding/tender in 1998 for the supply of medical equipment and pharmaceutical products to the Philippine Department of Health (DOH),in connection with the latter's Women Health and Safe Motherhood Project; that the tender was managed and continued to be run by GITEC, a German NGO; that one of the conditions of the grant as embodied in Article 3 of the bilateral agreement is that the Government of the Republic of the Philippines shall exempt the KFW from all taxes and other public charges levied in the Philippines in connection therewith ;that Helm Pharmaceuticals Gmbh ("Helm"),a corporation organized and existing under the laws of Germany and not licensed to do business in the Philippines, participated in the bidding conducted by KFW on behalf of the DOH; that Helm was awarded the entire project and entered into a contract dated October 29, 1998 with the DOH; that the contract required the delivery of a number of lots of medical equipment and pharmaceutical products; that part of the requirements of the grant by the German government is for the pharmaceutical products to be sourced from Germany; that however, two of the pharmaceutical products are patented and thus, must be purchased in the Philippines; that the first product is Tergetef (generic name Cefixime),manufactured in the Philippines by United Laboratories, Inc. ("Unilab") using imported raw materials in powder form from Japan; that the second is Rocephin (generic name Cetriaxome),completely made and packaged by Roche Switzerland and imported by Roche Philippines ("Roche Phil.");that Helm negotiated with Unilab and Roche Phil. ("the Suppliers"),both VAT-registered companies, to supply the two drug products on an FOB-Manila basis for onward delivery to the DOH; that pursuant to Section III, Item 7(Clause 13) re: Special Conditions of Contract between the DOH and Helm, KFW will release payment within 45 days from delivery of the goods and approval by the DOH ; that Helm requested quotations from the Suppliers on a VAT-free basis which quotations were used in the bidding/tender with the DOH; that the Suppliers, however, made a separate quotation for VAT and invoiced Helm inclusive of VAT; that payments will be made through an irrevocable US$ letter of credit opened by Helm in Germany and issued by Deutsche Bank Hamburg (with Citibank, N.A., Paseo de Roxas Branch, Makati City, Metro Manila as advising bank) in favor of Unilab and Roche Phil., respectively; and that despite Helm's assertion that the above transactions would be subject to zero percent (0%) VAT under Section 106(A)(2)(b) of the Tax Code of 1997, the Suppliers insisted to receive payment inclusive of VAT, hence, this request. In reply, please be informed that pursuant to the aforesaid Section 106(A)(2)(b) of the Tax Code of 1997, "sale to a non-resident of goods, except those mentioned in Sections 149 and 150, assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP) is subject to zero percent (0%) VAT". The issue in point is the sale of two (2) pharmaceutical products specifically Tergecef (generic name Cefixime) and Cetriazome (generic name Cetriaxome),by two domestic drug companies, Unilab and Roche Phil.,to Helm, a non resident German company not licensed to do business in the Philippines. Both domestic Suppliers are VAT-registered and their corresponding sales were paid in foreign currency using the fund of the grant released by KFW upon delivery of the goods and approval by the DOH. The prices corresponding thereto were billed with VAT despite the express condition proscribing payment of taxes and other public charges out of the grant extended by the German Government through its government-owned financial institution, the KFW. The aforesaid pharmaceutical products were delivered to the DOH, as beneficiary, in connection with its Women's Health and Safe Motherhood Project. While the grant specifically requires that pharmaceutical products be sourced from Germany, Tergecef and Rocephin were purchased in the Philippines as Tergecef is manufactured in the Philippines using imported raw materials from Japan and Rocephin is completely made and imported from Roche Switzerland by Roche Phil. In the light of the requirement imposed under the law that the goods should be assembled or manufactured in the Philippines for onward delivery to a resident in the Philippines, this Office hereby rules that only the sale of Tergecef by Unilab can be considered as foreign currency denominated sale falling under Section 106(A)(2)(b) of the Tax Code of 1997 hence, subject to the zero percent (0%) VAT. Insofar as the sale of Rocephin which is wholly manufactured by Roche Switzerland and was merely imported by Roche Phil. and thereafter sold to Helm for delivery to DOH, the same shall be subject to the ten percent (10%) VAT. Considering however, the restriction as to the use of fund for payment of taxes and other public charges levied by the Philippine Government, and the fact that Helm, a non-resident corporation is representing DOH, the latter, as the recipient of the pharmaceutical product Rocephin, shall in effect be the one liable to pay the VAT passed on by Roche Phil. (VAT BIR Ruling 021-00 dated June 9, 2000) But since DOH is a National Government agency, it is automatically entitled to tax subsidy under the 1998 General Appropriations Act which reads as follows: "XIII. DEPARTMENT OF HEALTH "II. Foreign-Assisted Project(s) "a. First Water Supply, Sewerage and Sanitation Sector Project (IBRD Loan No. 3242 PH) xx xx xx Peso Counterpart xx xx xx "b. Palawan Integrated Area Development Project (Phase II) (ADB Loan No. 1033/1034 PHI) xx xx Peso Counterpart xx xx "c. Urban health and Nutrition Project (IDA Loan No. 2506 PH) xx xx xx Peso Counterpart xx xx Loan Proceeds xx xx xx "d. Women's Health and Safe Motherhood Project (ADB Loan No. 1331-PHI-SF) xx xx xx Loan Proceeds xx xx xx "e. Women's Health and Safe Motherhood Project (IBRD Loan No. 3852-PH) xx xx xx Peso Counterpart xx xx Loan Proceeds xx xx xx "f. Women's health and Safe Motherhood Project (KFW Grant-Assisted) xx xx peso Counterpart xx xx "Special Provisions "xxx xxx xxx" "11. Appropriations for Programs and Specific Activities. The amounts herein appropriated for the following programs of the agency shall be used specifically for the following activities in the indicated amounts and conditions: "PROGRAMS AND ACTIVITIES "xxx xxx xxx "B. Foreign-Assisted Projects "Maintenance and Other Operating Expenses "xxx "21 Taxes, Duties and Fees 23,455 "xxx "Total Maintenance and Other Operating Expenses 890,484 ====== This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group