VAT Ruling No. 023-00

July 20, 2000 VAT RULING NO. 023-00 105, 106 (A) (2) (c), 108 (B) (3), 109 (q) VAT Ruling 062-91 Rep . Arnulfo P . Fuentebella 3rd District, Camarines Sur House of Representatives Quezon City Dear Rep. Fuentebella : This refers to your letter dated April 25, 2000, as endorsed to us by Undersecretary Cornelio C. Gison on May 4, 2000 requesting for exemption from the coverage of VAT of the Partido Development Administration's (PDA's) Water Supply System Project (PWSSP). It is represented that the Partido Development Administration (PDA) was created under Republic Act No. 7820 which was approved on November 18, 1994; that Section 13, paragraph 4 of the said law provides as follows: "Sec. 13. Foreign Loans . . . . "The loans, credits, and indebtedness contracted under this subsection 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 from 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." (Emphasis supplied) In reply, please be informed that the aforestated provision of R.A. No. 7820 clearly provides that only the importation of machinery, equipment, materials and supplies by the Administration (PDA) paid from the proceeds of the foreign loan incurred under the said law shall be exempt from all taxes imposed by the Republic of the Philippines, and that exemption includes VAT. Conversely, it can be implied that local sales of goods and services to the PDA in relation to the said project shall be subject to VAT, and consequently, the tax may be passed on or shifted to PDA, VAT being the direct liability of the seller and the amount of tax may be shifted on to the buyer pursuant to Sec. 105 of the Tax Code of 1997. aSTHDc However, please be further informed that Section 4-A of R.A. No. 4860, as amended, otherwise known as the "Foreign Borrowing Act" provides as follows: "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 agreements, as well as contracts involving the availment of or utilization of the proceeds of 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 relation to this, Sections 106(A)(2)(c) and 108(B)(3), both of the Tax Code of 1997, provide that " sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate ." Further, Sec. 109(q) of the same Tax Code provides that " transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws " shall be exempt from VAT. Granting that the foreign loan granted to the PDA comes within the purview of R.A. 4860, as amended, i.e., that the loan agreement or the contracts involving the utilization of the proceeds of the loans provided for the exemption from taxes upon the recommendation of the Secretary of Finance, in consultation with the NEDA, and as approved by the President of the Philippines, the sale of goods and services to the PDA for that specific project may legally be considered VAT exempt or effectively zero-rated, as the case may be. However, the said VAT exemption or effectively zero-rated sale transactions may only be availed of by the particular contractor or contractors to whom the said project was awarded in the subject foreign loan agreement. In other words, the said exemption or effective zero-rating shall only pertain to the awardees, and only to the said awardees , of the contracts from the PDA as can be established from the foreign loan agreement or from the contract itself involving the availment of or utilization of the proceeds of the loans. Thus, suppliers of goods and services or sub-contractors of the said awardees shall not be covered by the VAT exemption or effective zero-rating, as the case may be. (VAT Ruling No. 062-91 dated June 26, 1991) In view thereof, it is the opinion of this Office that all the importation of machinery, equipment, materials and supplies by the PDA paid from the proceeds of the foreign 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 from 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. It should be emphasized that the local sales of goods and services to PDA in connection with the said project may effectively be zero-rated only if the said awardees are VAT-registered persons and have applied and secured prior approval for effective zero-rating on their sale of goods and services to PDA. Without an approved application for zero-rating, the transaction otherwise entitled to effective zero-rating shall be considered only as exempt transaction. Thus, if the supplier of goods or services is effectively zero-rated or tax-exempt, no input VAT can be shifted to the Project. On the contrary, if the loan agreement or the contracts involving the availment of or utilization of the proceeds of the loans provide otherwise, then only the subject importation may be exempt from VAT, and the sales of goods and services of local suppliers shall be subject to VAT, as a consequence of which, the VAT may be shifted or passed on to PDA, the same being no longer a tax on the part of PDA but an additional cost which becomes a part of the amount of the contract price to be paid by it. (BIR Ruling No. 47-99 dated April 13, 1999) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. HDIaST Very truly yours, (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue