VAT Ruling No. 042-03

September 29, 2003 VAT RULING NO. 042-03 Sec. 105, 106, 107, 108, 109 (q) NIRC VAT Ruling No. 016-02 DKT Philippines, Inc. Suite 801 The Linden Suites 37 San Miguel Avenue Ortigas Center, Pasig City Attention: Terry L. Scott Country Director Gentlemen : This refers to your letter dated August 28, 2002 which in effect requests for a ruling exempting from the value added tax (VAT) certain activities in connection with the DKT Philippine Social Marketing Program. It is represented that DKT Philippines, Inc. (DKT for brevity) is registered with the Securities and Exchange Commission as a non-profit, non-stock, non-government organization tasked with the mission to make urgently needed contraceptives and reproductive health products and services widely available, accessible and affordable to even the lowest income people; that DKT is one of the participants in the Social Marketing Project which was launched by the Philippine Government to address the need for both HIV/AIDS prevention and family planning by distributing and promoting high-quality latex condoms and low-dose oral contraceptive pills on a national scale at prices that are affordable to lower income groups; that the financial requirements of this program was made possible through grants from the Government of the Federal Republic of Germany in an agreement with the Government of the Republic of the Philippines; that funding come from the German Government through the Kreditanstalt fur Weideraufbau (KfW); that the first round of which was in October 1995, in the amount of DM 13.0 Million, followed by an extension and expansion worth DM 20.0 Million intended for the period from October 2000 to December 2004 and a new grant was again provided by the German Government through KfW amounting to DM 5.3 Million for the expansion of the existing program through the provision of the oral contraceptive pills; that the Government of the Philippines, represented by the Department of Finance as the Recipient of Financial Contribution, channels the financial contribution in full to the Project Executing Agency (the Department of Health) or general contractor (DKT) for the implementation of the project expansion and extension; that the grant from the German Financial Cooperation with the Philippines through the KfW is composed of three agreements, namely: a. Financing Agreement between KfW and the Republic of the Philippines as "Recipient" (signed by the KfW representative and the Department of Finance); b. Separate agreement between KfW, Department of Finance, Department of Health, and DKT; c. Service agreement between the Department of Health and DKT; That the aforementioned agreements invariably provide that 1. "Philippine taxes and other public charges to be borne by the Recipient and import duties shall not be financed from the financial contribution" (Financing Agreement Section 1.3 Article 1); 2. "The Recipient shall bear all taxes and other public charges which will be imposed by the Republic of the Philippines in connection with the conclusion and execution of this Agreement, as well as all transfer and conversions accruing in connection with the disbursement of the financial contribution" (Financing Agreement Article 4) 3. "The General Contractor and his foreign staff shall be exempted from all taxes, duties, levies and other charges required by law of the Republic of the Philippines in connection with a. Payments to the General Contractor or his foreign staff in connection with the performance of the services, b. Services performed by the General Contractor or his staff in connection with the fulfillment of their tasks, c. Equipment, materials and supplies necessary for the performance of the Services, including motor vehicles and personal belongings of the foreign staff that are brought to the Philippines and shipped out after completion of the services or that have been destroyed in the course of the performance of the services, That if the execution of the above provision is prohibited by law, the Employer shall refund to the General Contractor all amounts paid" (Service Agreement Section 4.3 Article 4). Based on the foregoing, you now seek approval for the following: 1. VAT exemption for all importations; STECAc 2. VAT exemption for all local purchases; 3. Tax exemption for all services performed by the General Contractor (DKT) and its staff in connection with the fulfillment off their tasks; 4. Tax exemption, including VAT exemption, for equipment, materials and supplies necessary for the performance of the services, including motor vehicles and personal belongings of the foreign staff that are brought into the Philippines and shipped out after the completion of the services or that have been destroyed in the course of the performance of the services. In reply, please be informed as follows: 1. The importation of condoms and other contraceptives is subject to the 10% value added tax pursuant to Section 107(A) of the National Internal Revenue Code of 1997 (the Code) which states that, "There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten percent (10%) based on the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody . . ." 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 the DOH, through DKT, is the recipient of the imported condoms and other contraceptives, it shall in effect be the one liable to the VAT on importation. But since DOH is a National Government Agency, it is automatically entitled to tax subsidy [VAT Ruling No. 016-02 dated March 14, 2002 citing VAT Ruling No. 021-00, in relation to Sec. 109(q), NIRC] under the 2000 General Appropriations Act which reads as follows: "DEPARTMENT OF HEALTH" "II. Foreign-Assisted Projects a. Women's Health and Safe xx xx xx Motherhood Project (ADB Loan No. 1331 PH-SF) b. Women's Health and Safe xx xx xx Motherhood Project (IBRD Loan No. 3852 PHI) c. Women's Health and Safe xx xx xx Motherhood Project (KfW Grant) Peso Counterpart xx 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 44,912 xxx '"Total maintenance and operating expenses 4,891,235 ======= 2. Section 106(A) of the Code provides that "There shall be levied, assessed, and collected on every sale, barter or exchange of goods or properties a value added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor." The value added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services (Section 105, same Code). Accordingly, your request that your local purchases be net of VAT is hereby denied for lack of legal basis; 3. Item Nos. 3 and 4 are treated in the same manner as No. 1 subject of course to the availability of funds appropriated for the Department of Health. 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, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group