VAT Ruling No. 088-02

November 29, 2002 VAT RULING NO. 088-02 Sections 32, 106, 108 & 109, NIRC of 1997 BIR Ruling Nos. 077-88 & 088-92 Donato, Em, Santos & Zarate Attorneys and Counsellors-at-Law Suite 303, Greenbelt Mansion 106 Perea Street, Legaspi Village 1229 Makati City Attention: Demosthenes B. Donato, Esq. Gentlemen : This refers to your letters dated December 12, 2000 and April 10, 2001, requesting for confirmation of your opinion that the Global Environmental Facility/Efficient Lighting Initiative (GEF/ELI) Trust Fund used by IBERPACIFIC, INC. (IBERPACIFIC) for purposes of administering the GEF/ELI Program, is entitled to the same tax immunities as funds of the International Bank for Reconstruction and Development (IBRD),with particular regard to the matter of importation and purchase of laboratory equipment and effectively zero-rated value-added tax, pursuant to the following agreements to which the Philippines is a signatory, to wit: Instrument for the Establishment of the Restructured Global Environment Facility (Main Instrument) (hereinafter referred to as the "Instrument"),and Articles of Agreement of the IBRD, as amended (hereinafter referred to as the "Articles of Agreement"). It is represented that the GEF was established in the IBRD as a pilot program in order to assist in the protection of the global environment and promote environmentally sound and sustainable economic development by providing funds for such purposes in the form of grants and otherwise to certain qualifying projects through the GEF Trust Fund; that IBRD is an international financial institution established by foreign governments; that IBRD acts as both Trustee of the said Trust Fund and as an implementing agency of the GEF; that the Republic of the Philippines (RP) became a signatory to the Instrument on June 16, 1994; that as confirmed by the Department of Finance, through Assistant Secretary Roberto B. Tan, the RP is in fact a party to the said Articles of Agreement and Instrument; that the IBRD, in its capacity as Trustee and Implementing Agency of the GEF, entered into an agreement on May 16, 1996 with its affiliate international organization, the International Finance Corporation (IFC),whereby IBRD appointed IFC as an Executing Agency of the GEF, with authority to enter into agreements with eligible third parties for the financing of activities and projects related to the GEF; that IFC is an international financial institution established by foreign governments; that IFC, in its capacity as Executing Agency of the GEF, in turn entered into a Master Project Agreement dated November 18, 1999 with the Union Fenosa Ingeneria S.A. (UFISA),a corporation established under the laws of the Kingdom of Spain, whereby IFC appointed UFISA as administrator of the GEF/ELI Program in the Republic of the Philippines and the Republic of South Africa; that the ELI is a component program of the GEF designed to accelerate the penetration of energy efficient lighting technologies into the residential, commercial, institutional and industrial markets of developing and transitional economies; that the UFISA, in its capacity as administrator of the GEF/ELI Program for the Philippines and South Africa, in turn entered into an agreement dated May 2, 2000 with its affiliate corporation IBERPACIFIC (a corporation established under the laws of RP),whereby UFISA appointed IBERPACIFIC as administrator of the GEF/ELI Program for the Philippines; that the main objective of the Main Project for the Philippines is to reduce greenhouse emissions in the electricity sectors by building demand in the Philippine market for energy lighting; that this objective will be obtained by a set of complementing and coordinated interventions in the lighting products markets in the Philippines, which will cause an acceleration of the markets for efficient lighting products and services; that, as administrator, IBERPACIFIC may enter into a subcontract and/or agreement, in connection with the GEF/ELI Program, with the prior written approval of UFISA; that the scope of the services to be provided by IBERPACIFIC shall be limited to the performance of the managerial, administrative, financial, budgeting, cost control, auditing, and reporting activities needed for the implementation of the Main Project in the Philippines; that the scope will also include the technical, managerial and administrative supervision of the works and services to be implemented by local subcontractors; that in consideration of said services, UFISA shall pay IBERPACIFIC an amount of US$130,934; and that IBERPACIFIC shall open a bank account in which the GEF Trust Fund shall be disbursed, subject to the approval of UFISA and IFC. In reply, please be informed as follows: I. Exemption from the Value-added tax Section 109 of the National Internal Revenue Code (Tax Code) of 1997 provides, viz : "SEC. 109. 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." Section 9 of Article VII of the Articles of Agreement provides, viz : "SEC. 9. Immunities from Taxation. "(a) The Bank, its assets, property, income and its operations and transactions authorized by this Agreement, shall be immune from all taxation and from all customs duties. The Bank shall also be immune from liability for the collection or payment of any tax or duty. "xxx xxx xxx." Paragraph 13 of Annex B 1 of the Instrument: "13. The privileges and immunities accorded to the Trustee (i.e.,the IBRD) its Articles of Agreement shall apply to the property, assets, archives, income, operations and transaction of the (GEF Trust) Fund." Since the Philippines is a signatory to the Instrument and the Articles of Agreement, and considering that pursuant to the said international agreements, the immunities from all taxation being enjoyed by the Trustee and Implementing Agency of the GEF ( i.e. ,IBRD) extend to the GEF/ELI Trust Fund, such Trust Fund shall be exempt from value-added tax (VAT).Thus, any transaction in relation to, or any disbursement made from, such Trust Fund made by IBERPACIFIC (as administrator of the GEF/ELI Program for the Philippines) in connection with the GEF/ELI Program shall not be charged with any VAT. In addition, Sections 106(A)(2)(c) and 108(B)(3) of the Tax Code of 1997 provide, viz : "SEC. 106. Value-added Tax on Sale of Goods or Properties. "xxx xxx xxx. (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: "xxx xxx xxx "(c) 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." "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. "xxx xxx xxx "(B) Transaction Subject to Zero Percent (0%) Rate. The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: "xxx xxx xxx "(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate;" The purpose of these provisions is to maintain and recognize such exemption enjoyed by such entities as the IBRD by permitting sales (by domestic suppliers) to such entities to be zero-rated. This can be inferred from the fact that under the aforequoted provisions of the Tax Code of 1997 on zero-rating, it is not the person or entity enjoying tax-exemption privilege under special law or international agreement which is given the privilege of enjoying zero-rating under the VAT law, but sales (by suppliers) to such persons or entities which may be subject to the zero rate. In view of the foregoing, sales to the IBRD (as Trustee and Implementing Agency of the GEF), through IBERPACIFIC (as administrator of the GEF/ELI Program for the Philippines), in connection with the GEF/ELI Program, by a VAT-registered person are effectively zero-rated. However, pursuant to Section 4.107-1(d) of Revenue Regulations No. 7-95, any person claiming that its sales of goods or services are effectively zero-rated under Sections 106 and 108 shall file an application in a form prescribed therefor with the Commissioner of Internal Revenue justifying the imposition of zero rate on the said transactions. Upon approval, his status as a zero-rated taxpayer shall remain valid until revoked. ( BIR Ruling No. 077-88 dated March 4, 1988 ) II. Exemption from tax on interest income Section 32(B) of the Tax Code of 1997 provides, viz: "SEC. 32. Gross Income. "xxx xxx xxx. "(B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: 2 "xxx xxx xxx. "(7) Miscellaneous Items. "(a) Income Derived by Foreign Government. Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, and (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments. "xxx xxx xxx." In view of the foregoing provisions and considering that the IBRD is an international financial institution established by foreign governments, any interest income which may accrue to the said Fund shall not be subject to income tax. Thus, the interest income on the bank deposit opened by IBERPACIFIC upon which the GEF Trust Fund shall be disbursed shall not be subject to income tax, and consequently, to the withholding income tax. ( BIR Ruling No. 088-95 dated March 19, 1992 ) This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed or discovered that the facts are different, then this ruling shall be without force insofar as the parties herein are concerned. Very truly yours, (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group Footnotes 1. ROLE AND FIDUCIARY RESPONSIBILITIES OF THE TRUSTEE OF THE GEF TRUST FUND. 2. TITLE II TAX ON INCOME.