Pursuant to Sec. 11 of the “Host Agreement” between the United Nations and the Philippine government, it was provided that the World Health Organization (WHO), “its assets, income and other properties shall be : a) exempt from all direct and indirect taxes.” Precision Construction Corporation (PCC) was hired to construct the WHO Medical Center in Manila. Upon completion of the building, the BIR assessed a 12% VAT on the gross receipts of PCC derived from the construction of the WHO building. The BIR contends that the 12% VAT is not a direct nor an indirect tax on the WHO but a tax that is primarily due from the contractor and is therefore not covered by the Host Agreement. The WHO argues that the VAT is deemed an indirect tax as PCC can shift the tax burden to it. Is the BIR correct? Explain. (5%)
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No, the BIR is not correct. Under Section 108(B)(3) of the NIRC, services rendered to entities exempt under international agreements are effectively zero-rated. In CIR v. John Gotamco & Sons, Inc., the Supreme Court
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Quick check
How are services rendered to international entities exempt under international agreements treated for VAT purposes under Section 108(B)(3)?
Services rendered to entities exempt under international agreements are classified as effectively zero-rated sales under Section 108(B)(3) of the NIRC.
Under CIR versus John Gotamco and Sons, does WHO's exemption from indirect taxes extend to construction contractors?
Exemption from indirect taxes extends to contractors to prevent shifting the indirect tax burden to WHO.
What type of tax is Value-Added Tax regarding the relationship between statutory liability and economic burden?
Value-Added Tax is an indirect tax where the economic burden may be shifted to the purchaser.
Why is assessing 12% VAT on a local contractor constructing a WHO facility considered a violation of the Host Agreement?
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Which statutory provision of the NIRC governs the zero-rating of services supplied to entities exempt under international agreements?
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1. Indirect Tax Immunity
Under international law and host agreements executed by the Philippine government, international organizations like the World Health Organization enjoy tax immunity from direct and indirect taxes. As established in Commissioner of Internal Revenue versus John Gotamco and Sons, Incorporated, an exemption from indirect taxes extends to contractors performing construction services for the international organization. Because Value-Added Tax is an indirect tax where the economic burden can be shifted to the purchaser, assessing Value-Added Tax on the contractor's gross receipts violates the international tax immunity granted under the host agreement.
2. Effectively Zero Rated
Under Section 108(B)(3) of the National Internal Revenue Code, services rendered to persons or entities whose exemption under special laws or international agreements effectively subjects the supply of such services to a zero percent rate are classified as effectively zero-rated sales. Construction services rendered by a local contractor for the building of an international headquarters are subject to zero percent Value-Added Tax. Consequently, the local contractor incurs no Value-Added Tax liability on gross receipts derived from constructing facilities for a tax-exempt international entity.
3. Tax Shifting Doctrine
Value-Added Tax is an indirect tax wherein the statutory liability rests on the seller or contractor, but the economic burden may be shifted to the buyer or client. Where an international host agreement explicitly exempts an entity from both direct and indirect taxation, allowing a contractor to pass on the Value-Added Tax burden would nullify the treaty exemption. To uphold international commitments, the law prohibits the assessment of Value-Added Tax on transactions with tax-exempt international bodies to prevent indirect tax shifting.