VAT Ruling No. 027-02

April 30, 2002 VAT RULING NO. 027-02 Sec. 109 (q) VAT Ruling No. 008-98 Pea Sanchez Lacson Mison & Figueroa Suite 213, Parc Chateau Building Onyx cor. Garnet Streets, Ortigas Centre Pasig City Attention: Mr. Alexander L. Lacson and Ms. Maria Kristine A. Yulo Gentlemen : This refers to your letter dated September 5, 2001 requesting for reconsideration on the disapproval of the application for VAT zero-rating filed by your client, United Nations Development Programme (UNDP), invoking VAT Ruling No. 8-98 as the applicable precedent and not VAT Ruling No. 041-98. It is represented that UNDP purchased from one of its suppliers, Integrated Computer System, Inc. (supplier), seven (7) units of APC Backpro UPS more particularly described as computer units; computer peripherals and computer accessories; that the supplier relative to the purchase of UNDP filed an application for VAT zero-rate with the office of the Audit Information, Tax Exemption and Incentives Division of the Bureau of Internal Revenue (BIR); that the application was disapproved on the ground that the exemption privilege of UNDP is limited only to direct taxes and does not extend to indirect taxes pursuant to VAT Ruling No. 041-98; that you would want to clarify that the actual contract between UNDP and the supplier is only for the sale and purchase of goods, i.e., the seven (7) units of APC Backpro UPS and the provision of repair services, consulting and training by the supplier as referred to in the application are mere incentives given by the supplier, free-of-charge; that it is your opinion that VAT Ruling 008-98, which covers purchase of movable and immovable property for official use, citing Section 103 (q) (now 109 (q)) of the National Internal Revenue Code (NIRC) should instead apply to the purchase of UNDP and not VAT Ruling 041-98, which refers to purchase of services. In reply, please be advised that under Section 109 (q) of the NIRC, "transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree Nos. 66, 529 and 1590, shall be exempt from VAT." In relation thereto, Section 10 of the Convention on the Privileges and Immunities of the Specialized Agencies of the United Nations (Convention) adopted by the General Assembly on November 21, 1947 provides as follows: "While the specialized agencies will not, as a general rule, claim exemption from excise duties and from taxes on the sale of movable and immovable property which form part of the price to be paid, nevertheless, when specialized agencies are making important purchases for official use of property on which such duties and taxes have been charged or chargeable, States parties to this Convention will, whenever possible, make appropriate administrative arrangements for the remission or return of the duty or tax." Accordingly, the sale of movable and immovable property to the United Nations and its related organizations shall be exempt from VAT (VAT Ruling No. 008-98). It can be noted, however, that there is no counterpart provision for sale of services in the Convention. Under VAT Ruling No. 048-98, it was held that the tax exemption privileges granted to the specialized agencies of the United Nations pursuant to Section 9 (a) of the Convention are limited only to direct taxes and consequently, the sale of services to UNDP is not exempt from VAT. The two rulings are not inconsistent with each other as VAT Ruling No. 008-98 pertains to sale of goods to UNDP for which the applicable provision under the Convention is Section 10 while VAT Ruling No. 048-98 pertains to sale of services which is subject to VAT since there is no particular provision in the Convention exempting the same from the payment of indirect taxes. The issue now is whether or not the sale of the seven (7) units APC Backpro UPS, which includes the provision of repair services, consulting and training is a sale of property or a sale of services. In view of the foregoing representation that the actual contract between UNDP and the supplier is only for the sale and purchase of goods, and that the provision of services are mere incentives given by the supplier, free-of-charge, the said sale is not subject to zero percent VAT but is exempt from VAT under Section 109 (q) of the NIRC in relation to Section 10 of the Convention. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group