VAT Ruling No. 051-01

July 23, 2001 VAT RULING NO. 051-01 RMC 32-99, RMC 42-99 000-00 Punongbayan & Araullo Ernst & Young International 20/F Tower I, The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: Ms . Marivic C . Espao Tax Partner Gentlemen : This refers to your letter, dated August 2, 2000, requesting on behalf of your client, TRANSPORT RESEARCH FOUNDATION, INC . (TRF) , for a confirmation of your opinion that the provisions of Revenue Memorandum Circular (RMC) Nos. 32-99 and 42-99, Presidential Decree (PD) No. 1177, as well as Section 13 of the General Appropriations Act of FY 2000 may find application to the herein case of your said client, hence: "1. TRF is not subject to income tax on its service fees derived under the Agreement ; "2. TRF is not subject to the creditable withholding tax (CWT) of one percent (1%) on its income and is entitled to a refund of previously paid CWT from Department of Public Works and Highways (DPWH); and "3. TRF is not liable for value-added tax (VAT) on its gross receipts for service rendered to the DPWH pursuant to the Agreement dated April 3, 1998 ." It is represented that TRF is a company duly organized and existing under the laws of the United Kingdom (UK) with principal office at Old Workingham Road, Crowthorne, Berkshire, RG45, 6 AU, United Kingdom; that it has been duly licensed by the Philippine Securities and Exchange Commission (SEC) to do business in the Philippines through a branch office under the name "TRANSPORT RESEARCH LABORATORY" (TRL); that TRL has SEC license No. A199817622 issued thereto on December 7, 1998; that TRF is registered as a VAT taxpayer; that, on April 3, 1998, TRL and the Philippine Government, represented by the DPWH, entered into a "Pavement Investigation Research Consultancy Agreement," a component of the Proposed Technology Development Program under the Sixth Asian Development Bank Road Project; that, the pertinent portions of the said Consultancy Agreement read as follows: "6.1 The Government shall assume the burden of such taxes, including Value Added Tax, whether national or local, duties or levies, if any, as are payable on any and all compensations, payments, or reimbursements on or expenses undertaken to be paid or assumed by the Government under this Agreement in favor of the Consultants. Accordingly, the government hereby undertakes to provide or cause to be provided to the Consultants the necessary tax, customs and other clearances for the purposes for which any of the same may be demanded by any Government officer or court from the Consultants during their stay in or on the occasion of their departure from the Philippines. "6.2 If, notwithstanding, the assurance on the preceding clauses, the Consultants are, for any reason, compelled to pay any such taxes, duties or levies mentioned in Clause 6.1, then in that event the Government will immediately reimburse the consultants for any and all taxes, duties or levies assessed and collected against them in connection with the services rendered under this Agreement. cSaCDT "6.3 Any and all compensations, payments, reimbursements or expenses undertaken to be paid or assumed by the Government in favor of the Consultants under this Agreement are understood to have been determined and established to be net of the Value-Added Tax, Joint Venture Tax, duties and other forms of Government levy attributable to the services rendered under this Agreement. "6.4 If, notwithstanding the assurance of the preceding paragraphs, the consultants are, for any reason, compelled to pay the Value-Added Tax, Joint Venture Tax, duties or levies, then in that event the Government will immediately reimburse the consultants for such taxes, duties or levies mentioned in Clause 6.3 assessed and collected against them in connection with the services." In reply, please be informed as follows: 1. RMC No. 32-99 . This exclusively pertains to the "Exchange of Notes dated March 26, 1991 between the Republic of the Philippines and the Government of Japan" which partakes the nature of an International Agreement (See Kurnagai-Gumi Co. Ltd. (Phil. Branch) versus The Commissioner of Internal Revenue, CTA Case No. 4670, prom. July 29, 1997). Hence, it has the force and effect of law. 2. RMC No. 42-99 . This pertains to the "Exchange of Notes between the Republic of the Philippines and the Government of Japan" for OECF Funded Projects undertaken in the Philippines. Similarly, its provisions also partake the nature of an International Agreement hence, have the force and effect of a law. 3. TRF-DPWH Consultancy Agreement . The herein Consultancy Agreement between TRF (a private entity) and the DPWH is not an International Agreement because it is not an agreement between the Republic of the Philippines and another State. Hence, its stipulations shall only bind the parties, i.e., TRF and DPWH. It has no force and effect of law. It cannot create any tax exemption privilege. Accordingly, RMC No. 32-99 and RMC No. 42-99 have no application vis-a-vis the aforesaid TRF-DPWH Consultancy Agreement. 4. Presidential Decree No. 1177 . You did not state or explain the relevance of P.D. 1177 to the herein case. But, at any rate, its provision relating to taxes is embodied in Section 23 thereof, as follows: "SEC. 23. Tax and Duty Exemptions . All units of government including government-owned or controlled corporations shall pay income taxes, customs duties and other taxes and fees as are imposed under revenue laws: provided that organizations otherwise exempted by law from the payment of such taxes/duties may ask for a subsidy from the General Fund in the exact amount of taxes/duties due: provided, further that a procedure shall be established by the Secretary of Finance and the Commissioner of the Budget, whereby such subsidiaries shall automatically be considered as both revenue and expenditure of the General fund." It will be observed that the above quoted law is a tax imposition on all government entities provided, however, that certain qualified government entities may secure "subsidy" from the General Fund to pay for their respective taxes. This law has no application to non-government entities, hence, may not be invoked in favor of the TRF. That, the DPWH agreed to pay for the taxes due from TRF in connection with its sale of service to the DPWH, is not binding to the BIR. It is only binding between TRF/TRL and the DPWH. It does not make the DPWH the person liable for the tax. At the most, DPWH is only duty bound to reimburse the aforesaid taxes for which TRF/TRL would be directly liable. Moreover, this Office has no jurisdiction to resolve whether or not DPWH may be legally entitled to "subsidy" pursuant to Section 23 of P.D. 1177. This determination is within the province of the Fiscal Incentives Review Board and the Department of Budget Management. 5. Section 13, FY 2000 General Appropriations Act . This law provides: "SEC. 13. National Internal Revenue Taxes and Import Duties of National Government Agencies including the Light Rail Transit Authority (LRTA) Home Development Mutual Fund (HDMF), National Food Authority (NFA), Cultural Center of the Philippines (CCP), Specialty Hospitals, Department of National Defense (DND), and the Philippine National Police (PNP). National internal revenue taxes and import duties payable by national government agencies to the national Government arising from foreign donations grants and loans are deemed automatically appropriated. Tax expenditure subsidy to the light Rail Transit Authority (LRTA Metro Manila Strategic Mass Rail Transit development line 2 package 4), Home Development Mutual Fund, National Food Authority Cultural Center of the Phil, Specialty Hospitals, DND & PNP importations of military hardwares software, ammunitions, arms and equipment, shall be deemed automatically appropriated subject to approval by the fiscal incentive review board (FIRB) pursuant to executive order no 93 s. of 1986 as amended. The amount pertaining to such taxes and duties shall be considered as revenue and expenditure of the govt.: PROVIDED, That in the case of NFA, customs duties and taxes referred to pertain only to calendar year 1999." aCITEH Similarly, the above quoted law is not a tax exemption law. It merely provides for "automatic appropriation" for the tax liabilities of certain qualified government entities. The implementation of this law is within the jurisdiction of the Fiscal Incentives Review Board and the Department of Budget Management. This law may not be invoked by TRF/TRL in its bid for exemption from national internal revenue taxes. In view of the foregoing premises, this Office regrets to inform that your aforesaid request for tax exemption cannot be granted for lack of legal basis. Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue