Adige Bitumi Impresa-Sta. Clara Joint Venture

January 15, 2008 BIR RULING [DA-009-08] RMC 42-99; DA-299-04; DA-244-06 Adige Bitumi Impresa-Sta. Clara Joint Venture No. 97 EDSA, Guadalupe Makati City Attention: Mr. Ulysses M. Bautista Authorized Managing Officer Gentlemen : This refers to your letter dated November 27, 2007 requesting in effect for a ruling that the payments to be received by Adige Bitumi Impresa-Sta. Clara Joint Venture with respect to the construction works performed for the Help for Catubig Agricultural Advancement Project in Northern Samar, a project of the Department of Public Works and Highways (DPWH) and financed by the Japan Bank International Cooperation (JBIC), under JBIC Loan Agreement No. PH-P221, is not subject to the 5% withholding value-added tax (VAT). It is represented that Adige Bitumi Impresa S.P.A. entered into a Joint Venture with Sta. Clara International Corporation (known as "Adige Bitumi Impresa-Sta. Clara Joint Venture"), for the purpose of undertaking construction services for the Help for Catubig Agricultural Advancement Project in Northern Samar, a project of the Department of Public Works and Highways (DPWH) and financed by the Japan Bank International Cooperation (JBIC), under JBIC Loan Agreement No. PH-P221; that this project is covered by a standard Exchange of Notes between the Philippine and Japanese governments for non-utilization of loaned amount to pay taxes, and the assumption of tax by the participating government agency. In reply, please be informed that, under Revenue Memorandum Circular No. 42-99 dated June 2, 1999, Overseas Economic Cooperation Fund (OECF) Funded Projects (now JBIC) are covered by the standard clauses of the Exchange Notes between the Japanese Government and the Republic of the Philippines, which reads: SCHATc "The government of the Republic of the Philippines will exempt the Fund from all fiscal levies or taxes imposed in the Republic of the Philippines on and/or in connection with the Project Loan, the Engineering Service Package Loan and the Commodity Loan, as well as interest accruing therefrom." "The Government of the Republic of the Philippines will, itself or through its executing agencies or instrumentalities, assume all fiscal levies or taxes imposed in the Republic of the Philippines on Japanese firms and nationals operating as suppliers, contractors or consultants on and/or in connection with any income that may accrue from the supply of products and/or services to be provided under the Project Loan." RMC 42-99 established that under the first clause cited above, it is the intention of the two governments not to use the proceeds of the loan in the payment of all fiscal levies or taxes imposed by the Philippines. In view thereof, this Office held that the executing government agencies should not impose the 5% withholding VAT prescribed under Section 114 (C) of the Tax Code of 1997, as amended by R.A. 9337 and as implemented by Revenue Regulations No. 16-2005, as amended, for government public works contractors undertaking OECF (now JBIC)-handed projects. Otherwise, the covenant not to subject the funded amount to taxes, which is the clear intent of both the Philippine and the Japanese Governments under the Exchange of Notes might be violated. Since the Help for Catubig Agricultural Advancement Project in Northern Samar is a JBIC funded project, DPWH, the implementing agency, should not impose the 5% withholding VAT prescribed under Section 114 (C) of the Tax Code, as amended, from the invoice billing of the said joint venture. (BIR Ruling Nos. DA-244-06 dated April 12, 2006 and DA-299-04 dated June 1, 2004 citing VAT Ruling No. 024-00 dated July 27, 2000) AcHCED This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service