VAT Ruling No. 047-94

February 8, 1994 VAT RULING NO. 047-94 Sec. 99; 000-00 Joaquin Cunanan & Company, CPAs 8th Floor, BA Lepanto Building, 8747 Paseo de Roxas, Makati Metro Manila Attention: Ms. Tomasa H. Lipana Partner Gentlemen : This refers to your letter dated July 11, 1991 in behalf of your client, Concrete Aggregates Corporation, requesting approval of its application for the zero-rating of its sales of services to the Republic of the Philippines through the Department of Public Works and Highways relative to a road construction project funded by a loan from the Asian Development Bank. HITAEC It appears that the Memorandum of Understanding for the Construction of Package 3-2 (B), Manjuyod-Bugawines Road and Fourth Road Improvement Project entered into on September 16, 1986 contains the following tax exemption clause and funding provision ". . . It was agreed that the part of the proposed Bank Loan for local currency financing shall be applied to fully cover local currency expenditures for consulting services including the services of domestic consultants referred to in paragraph 7 and 9 less local taxes, and the balance for the local costs of civil works excluding taxes and duties. " (emphasis supplied) A proposed financing plan for the Project would be as follows: Proposed Financing Plan ($ Million) Source Foreign Costs Local Costs Total Bank 59.30 22.70 82.70 Government - 20.50 20.50 Total 59.30 43.20 102.50 ===== ===== ===== (Par. V(a), 14, MOU) In reply, please be informed that when the agreement was signed on September 16, 1986 by then Secretary of Finance, Jaime V. Ongpin for the Philippines, the prevailing fundamental law of the land is the Freedom Constitution under which the President exercised both executive and law-making powers which also includes the power to grant tax exemption. Thus, when the President authorized then Secretary of Finance to enter into a contract of loan with ADB as indicated in the authority issued on October 30, 1986, the grant of tax exemption to accommodate the condition of the creditor in the grant of the loan is understandably delegated being incidental to the power to enter into a contract. The present constitutional prohibition against the grant of tax exemption without the concurrence of the majority of the members of Congress is considered silent during the fusion of the executive and legislative powers under the Freedom Constitution. Accordingly, the sale of services by your client, Concrete Aggregates Corporation, shall be exempt from VAT pursuant to Section 103 (u) of the Tax Code. Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue