REVENUE MEMORANDUM CIRCULAR (RMC) NO. 73-2026
I. PURPOSE
This circular explains the tax rules for activities and transactions carried out under the Philippines-US Agreement on Narcotics Control and Law Enforcement. It clarifies when purchases of goods and services may qualify for Value Added Tax (VAT) zero-rating (0% VAT) or VAT exemption and provides guidelines on how these VAT benefits should be applied.
It also explains the tax treatment of direct taxes affecting the transactions made by USG, its implementing partners, contractors, and personnel involved in the program, ensuring compliance with the Philippine Tax Code and relevant international agreements.
II. COVERAGE
This Circular covers:
a. the tax treatment of the Covered Transactions made by the USG or its implementing partners; and
b. the applicable treatment of direct and indirect taxes on Implementing Partners and USG personnel engaged in the implementation of the Covered Program.
III. DEFINITION OF TERMS
| Terms | Definition |
| Contractor | An individual or organization (domestic or foreign) hired by the USG or its implementing office to provide specific services, outputs, or deliverables for the Covered Program and acts on behalf of the USG within the agreed scope of work. |
| Covered Program | A USG-funded project under the LOA that supports the development of the Philippine criminal justice system. |
| Covered Transactions | Sales, purchases, imports, or use of goods and services that are directly and exclusively related to the Covered Program and supported by the required documents. |
| Direct Tax | A tax paid directly by the taxpayer and cannot be transferred to another person, such as income tax. |
| Grantee | A person, organization, or institution that receives financial assistance from the USG to implement or support narcotics control and law enforcement activities. They are not suppliers of goods or services under a contract. |
| Implementing Office | The USG office, such as the U.S. Embassy or its designated unit, responsible for managing and overseeing the Covered Program. |
| Implementing Partners | Contractors, grantees, recipients, or other entities authorized, engaged, or funded by the USG to carry out the Covered Program. |
| Indirect Tax | A tax that can be passed on to another person, such as VAT. |
| Letter of Agreement (LOA) | The agreement between the Philippine Government and the USG on Narcotics Control and Law Enforcement, including any amendments and related arrangements. |
| Non-Exempt Persons or Entities | Individuals or organizations not entitled to tax exemptions under the LOA, such as Filipino citizens, permanent residents, domestic corporations, and other taxpayers not specifically granted exemption. |
| Recipient | Any government, non-government, profit, or non-profit organization that receives financial assistance (such as grants or cooperative agreements) from the USG to implement the Covered Program. |
| United States Government (USG) | The Government of the United States of America, including the U.S. Embassy in the Philippines and other authorized offices responsible for implementing the LOA. |
| Value-Added Tax (VAT) | Indirect tax imposed on the sale, barter, exchange, or lease of goods or properties and services, and on the importation of goods. |
| VAT Certificate (VC) | A certificate issued by the BIR through the International Tax Affairs Division (ITAD) that authorizes qualified USG transactions and implementing partners to avail of VAT zero-rating or VAT exemption. It also confirms VAT exemption of eligible USG personnel and their accompanying family members based on reciprocity. |
IV. TAX TREATMENT
| Covered Transaction | Tax Treatment |
| Local Sale of Goods and Services by VAT -Registered Sellers | Sales to the USG through its Implementing Partners are subject to 0% VAT (Zero-Rated), provided all substantiation and invoicing requirements are met. Implementing Partners may avail of this treatment through a valid VC of Entitlement. |
| Services Rendered by Nonresident Sellers | Services provided by nonresident sellers are VAT-Exempt to ensure that the USG does not bear the burden of VAT. |
| Importation of Goods or Properties | Importation of goods or properties for the Covered Program, including subsequent disposition, is VAT-Exempt. |
| Local Sale of Goods and Services by Non-VAT Registered Sellers | Transactions are VAT-Exempt. Non-VAT registered sellers are instead subject to the applicable 3% Percentage Tax. |
| Tax on the Income of Contractors | Income from services performed in the Philippines by any nonresident alien contractor in connection with the LOA is exempt from Philippine income tax. However, other Philippine-sourced income not related to the LOA remains taxable unless covered by exemptions or preferential rates under the Philippines-United States Tax Treaty. Income derived by all other contractors shall be subject income tax under the Tax Code, as amended. |
| Tax on USG Personnel | Nonresident alien personnel employed by the USG and assigned to duties in the Philippines in connection with the LOA, including accompanying family members, are granted privileges and immunities similar to those accorded to administrative and technical staff of the U.S. Embassy. Income Tax – Compensation received for services rendered in connection with the LOA is exempt from Philippine income tax. However, other Philippine-sourced income not related to official LOA functions remains taxable unless exempt or entitled to preferential treatment under the PH-US Tax Treaty. VAT Exemption on the Basis of Reciprocity – Personal purchases of goods and services by eligible USG personnel and accompanying family members may be exempt from VAT, subject to securing a VC from the BIR and compliance with applicable procedures. |
| Other USG Personnel | Income earned by other USG personnel, including Philippine citizens or permanent residents, and personal purchases of goods and services are subject to income tax and VAT in accordance with the Tax Code, as amended. |
V. RECOGNITION OF IMPLEMENTING PARTNERS
Only Implementing Partners properly identified and confirmed by the USG through diplomatic channels may receive the exemption privileges under the LOA. The exemption applies only to transactions directly related to the Covered Program; unrelated sales remain subject to the Tax Code, as amended and other applicable laws.
VI. PROCEDURE AND ISSUANCE OF VCs
| Steps | Procedures |
| Filing of Application for VC | The Implementing Partner or authorized representative submits an application to the ITAD with: Endorsement/certification from the USG, duly endorsed by the Department of Foreign Affairs (DFA).Description of the Covered Program, including duration and scope.Contract, grant agreement, or similar proof of engagement. Certificate of Registration showing TIN and registration details. Other documents as required by ITAD. |
| Evaluation by ITAD | ITAD reviews the application and: Verifies the authenticity of submitted endorsements and documents. Confirms if the project/program is covered by the LOA. Assesses eligibility for VAT exemption or zero-rating. |
| Issuance of VC | If approved, ITAD issues a VC containing: Name of the Implementing Partner. Covered Program. Validity period of the VC. Any applicable conditions or limitations. |
| Validity and Scope | The VC is valid only for the specified period and Covered Program. It applies only to transactions directly related to the covered activity. |
| Presentation of VC at Point of Sale | The Implementing Partner must present the VC to VAT-registered sellers during the transaction to avail of the VAT exemption at the point of sale. |
VII. INVOICING REQUIREMENTS
VAT-registered sellers shall issue a VAT invoice for each sale, indicating the following:
| Required Information | Details |
| Seller Information | Registered name, address, and TIN of the seller |
| Implementing Partner Information | Registered name of the Implementing Partner and indication that the sale is for a Covered Program |
| Sales Amount | Total amount of sales |
| VAT Classification | VAT amount with a clear notation of either “VAT-Exempt Sale” or “Zero-Rated Sale“, as applicable |
| Transaction Details | Date of transaction, quantity, unit cost, and description of goods or nature of services |
| Reference Number | Valid VC Number or equivalent reference |
VIII. REVIEW AND AUDIT
Implementing Partners and sellers availing of VAT exemption and zero-rating, respectively, shall be subject to post-audit and verification by the BIR. All concerned parties shall maintain, for the period prescribed under existing laws, complete and adequate records to establish that the:
a. transactions are directly and exclusively related to the implementation of the Covered Program; and
b. the applicable VAT treatment has been properly applied in accordance with this Circular and existing laws.
Such records shall include, but shall not be limited to, invoices, contracts, proof of payment, and the corresponding VC. Failure to comply with the requirements herein, including any misuse, abuse, misrepresentation, or improper application of VAT privileges, shall result in the:
a. disallowance of the VAT zero-rating or exemption;
b. assessment and collection of the appropriate taxes, including penalties, surcharges, and interest under the Tax Code; and
c. such other sanctions as may be imposed under existing laws and regulations.
IX. VERIFICATION OF EXEMPTION AND LIMITATION ON TAX PRIVILEGES
In cases where the VAT exemption or zero-rating is not honored at the point of sale, the BIR, through the ITAD, shall provide assistance in resolving such matter.
Nothing in this Circular shall be construed as granting any tax exemption beyond those expressly provided under existing laws, treaties, or applicable international agreements.
X. REPEALING CLAUSE AND EFFECTIVITY
Any revenue issuances or provisions inconsistent with this Circular are hereby amended, modified, or repealed accordingly. This Circular shall take effect immediately upon issuance. All concerned parties are enjoined to comply with its provisions and ensure its widest possible dissemination.