VAT Ruling No. 062-91

June 26, 1991 VAT RULING NO. 062-91 International Pipe Industries Corporation Barrio Ugong, Ortigas Avenue Pasig, Metro Manila Attention: Mr . Manuel A . Baguio Vice President & General Manager Gentlemen : This refers to your letter to the Department of Finance, dated August 29, 1990, which was indorsed to this Office for corresponding action, and your follow up letter dated March 7, 1991, concerning your request that your sales of steel pipes to J. V. ANGELES CONSTRUCTION CORPORATION be subjected to the zero-rated value added tax. prll It is represented that J. V. ANGELES CONSTRUCTION CORPORATION is a contractor of the Metropolitan Waterworks and Sewerage System (MWSS), a government agency, for the construction of the latter's MWSS Coastal Road Waterworks project; that, the said government project is funded by the International Bank for Reconstruction and Development (IBRD, otherwise known as the WORLD BANK); that, you are the supplier of J. V. Angeles Construction Corporation for steel pipes that the said contractor uses in pursuing its construction services to the MWSS; that, under Presidential Decree No. 1820 in relation to Executive Order No. 765, particularly the latter's fourth whereases, "sale of domestic manufacturers for the supply of articles for government projects, financed from the proceeds of foreign loans" are considered internal export. Hence, your sales of steel pipes unto J.V. Angeles Construction Corporation should be considered subject to zero percent VAT based on the provisions of Section 100(a)(1), NIRC. Please be informed that, while export sales of goods are subject to zero percent VAT under Section 100(a)(1), NIRC, the term "export sales" is, however, limited in application. It is restricted to actual exports and foreign currency denominated sales . "'Export sales' means the sale and shipment or exportation of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer or ownership of the goods so exported, or foreign currency denominated sales. 'Foreign currency Denominated Sales' means sales to non-residents of goods assembled or manufactured in the Philippines, for delivery to residents in the Philippines and paid for in convertible foreign currency remitted through the banking system in the Philippines." (Sec. 100(a), NIRC, as amended by E.O. 273) "The provisions of any law, whether general or special, rules and regulations and other issuances or parts thereof which are inconsistent with this Order are hereby repealed, amended or modified accordingly." (Sec. 29, E.O. 273) Accordingly, the term "internal export" under P.D. 1820 and Executive Order No. 765 (which are laws prior to E.O. 273), being inconsistent with the term "export sales" under the VAT law (subsequent law), does not apply for VAT purposes. (See VAT Ruling No. 202-90, issued October 12, 1990) Further, please be informed that under Section 4-A of R.A. 4860, as amended by Presidential Decree No. 150, otherwise known as the Foreign Borrowing Act, "Upon the recommendation of the Secretary of Finance, in consultation with the National Economic and Development Authority and approval of the President of the Philippines, loan agreements as well as contracts involving the availment of or utilization of the proceeds of loans, credits or indebtedness obtained under the provisions of this Act, may provide for the exemption from taxes, charges, or other levies ." At the same time, Section 100(a)(2), NIRC, provides that "sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero-rate" shall be subject to zero percent VAT. Granting, that the loan agreement between the Republic of the Philippines and the International Bank for Reconstruction and Development (World Bank) comes within the purview of R.A. 4860, as amended, or within the purview of an International Agreement under Section 100(a)(2), NIRC, a reading of the said agreement (copy of which was submitted in your letter of March 7, 1991) does not, however show that your sales of steel pipes to J.V. Angeles Construction Corporation may be legally considered VAT exempt or subject to zero rate. First, and foremost, there is no showing that you are the contractor or supplier of the said MWSS Coastal Road Waterworks Project. Rather, the contractor is J.V. Angeles Construction Corporation. Your supplying of steel pipes to the said corporation does not make you a contractor of the MWSS. Hence, the provisions of the said foreign loan agreement does not apply and thus may not be extended in your favor. Schedule 1, Sec. 1, Part A(1) of the said RP-IBRD loan agreement provides: LLpr "Except as provided in Part C hereof, goods and works shall be procured under contracts awarded in accordance with procedures consistent with those set forth in Sections I and II of the 'Guidelines for Procurement under IBRD Loans and IDA Credits' published by the Bank in May 1985 (the Guidelines)." Granting that the said Guidelines published by the IBRD on May 1985 provides for tax exemption privileges, it is shown, however, that the said Guidelines only pertain to the awardees of contracts from the MWSS which you are not. The Awardee of contract (i.e.,the contractor) is rather J.V. Angeles Construction Corporation. Your being the supplier of this Corporation does not make you, an awardee of the contract with the MWSS. Second, you did not submit with your letter a copy of the said IBRD Guidelines published in May 1985. On the contrary, what was submitted with your letter is a copy of "General Conditions Applicable to Loan and Guarantee Agreements" published on January 1, 1985 by the IBRD. Third, you have not shown any particular provisions in the said international loan agreement by which your sales to J.V. Angeles Construction Corporation may be considered embraced by the said agreement, particularly, its tax exemption proviso, if there is any. In view thereof, please be informed that your sales of steel pipes unto J.V. Angeles Construction Corporation may not be considered subject to zero percent VAT under Section 100, NIRC. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue