VAT Ruling No. 041-98

November 11, 1998 VAT RULING NO. 041-98 109-000-00-041-98 Department of Foreign Affairs # 2338 Roxas Boulevard Pasay City Attention: Hon . Aladin G . Villacorte Acting Assistant Commissioner Gentlemen : This refers to your letter (Reference No. PVT/JVC 2670/98) dated September 8, 1998 requesting for and on behalf of the United Nations Development Programme (UNDP) and other international organizations under the United Nations Systems (such as the World Health Organization, International Labor Organization, International Monetary Fund, etc.) with offices in the Philippines, exemption from the value-added tax (VAT) on their local purchases of services. It is represented that under Section 7 of the Convention on the Privileges and Immunities of the United Nations, an agreement entered into between the Philippines and the UNDP, the latter is exempted from all direct taxes imposed by the Philippine government; and that under Section 11 of the Host Agreement between the Philippines and the World Health Organization (WHO), the latter is exempted both from direct and indirect taxes. It is further represented that the granting of VAT exemption to the purchases of services by the UNDP and other United Nations (UN) offices would help the UN and related organizations maintain the level of their presence in the Philippines, and thus contribute positively to the economy and the development process; that it would preclude the need to go through the time-consuming and cumbersome process of amending each and every headquarters/hosting agreement to have the same words of exemption used in the WHO Agreement; and that the funds to be saved by UNDP would be put to further use towards fulfilling the UN mandate of aiding the development process. Based on the foregoing, you are now inquiring if there is any provision under our internal revenue law that would constitute as basis the granting of VAT exemption on the purchases of services by UNDP and other UN offices. In reply, please be informed that Section 109 of the National Internal Revenue Code of 1997 provides, viz : "Exempt transactions The following shall be exempt from the value-added tax: "xxx xxx xxx "(q) 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; (Emphasis supplied) "xxx xxx xxx" In view of this provision, UNDP and other UN agencies may only be exempted from VAT when there is an express provision to this effect in the Agreements or Conventions entered into by the Republic of the Philippines with the said agencies. LLpr Pursuant to Section 7(a) of the Convention on the Privileges and Immunities of the UN, and Section 9(a) of the Convention on the Privileges and Immunities of the Specialized Agencies of the UN, the tax exemption privileges granted to said agencies are limited only to direct taxes. Consequently, the UNDP, and other UN agencies covered by the latter Convention, are exempt only from taxes for which they are directly liable. Their tax exemption privilege does not extend to the exemption from indirect taxes (e.g. ad valorem tax and VAT). However, some Agreements or Convention, to which the Republic of the Philippines is a signatory, indicate that there are other UN agencies which are exempt from the payment of indirect taxes, they are as follows: 1. World Health Organization (Section 11, Host Agreement between the Republic of the Philippines); 2. International Monetary Fund (Section 9, Agreements of the International Monetary Fund); 3. International Bank for Reconstruction and Development (Section 9, Articles of Agreement of the International Bank for Reconstruction and Development); and 4. United Nations International Children ' s Emergency Fund (Article VI (a), Agreement between UNICEF and the Government of the Philippines concerning the activities of the UNICEF in the Philippines). In view thereof, the UN agencies referred to in the preceding paragraph are the only agencies which are exempt from the payment of VAT on their local purchases of services. LibLex Please be guided accordingly. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue