BIR Ruling [DA-064-06]

March 1, 2006 BIR RULING [DA-064-06] RMC 42-99; 043-90 Department of Public Works and Highways Office of the Secretary Bonifacio Drive, Port Area Manila Attention: Mr. Salvador A. Pleyto, CESO II Undersecretary (In-charge of BOE, BOM, BOC and BOD) Gentlemen : This refers to your letter dated November 8, 2005 requesting clarification as to whether Revenue Memorandum Circular No. 42-99 dated June 2, 1999 also applies to Grant-in Aid Projects of Japanese contractors or nationals engaged in OECF-funded projects in the Philippines. It is represented that the Department of Public Works and Highways (DPWH) applied for a grant-aid under Japan's General Grant Aid Programs entitled "Project for Enhancement of Road Maintenance Capability for the Philippine-Japan Friendship Highways."; that under the Grant-In-Aid project, the Japanese Government is committed to grant the DPWH thru the Bureau of Equipment, seventy two (72) units of various Road Construction and Maintenance equipment including spare parts, two hundred fifteen (215) pieces of workshop tools/equipment and construction of one (1) training center in Davao City; that a Preliminary Study has been conducted recently by the representatives of the donor country; that however, in the Minutes of Discussions, the Japanese Team pointed out that the refund of VAT imposed on Japanese Nationals with respect to the supply of the products and services has not been executed in some previous Japan's Grant Aid Projects; that the solution of the issue on the exemption/refund of VAT by the Government of the Philippines will be one of the prerequisites prior to proceeding to the next stage (Basic Design Study) of Japan's Grant Aid Scheme. In reply, please be advised that under the Exchange of Notes for grant-aids by the Government of Japan and the Government of the Republic of the Philippines, the following tax incentives provisions are invariably present: "The Government of the Republic of the Philippines will take necessary measures: "To exempt Japanese nationals from customs duties, internal taxes and other fiscal levies which may be imposed in the Republic of the Philippines with respect to the supply of the products and services under the Verified Contracts; "To bear all the expenses, other than those covered by the Grant, necessary for the execution of the Project." Likewise, it is the condition of the Grant that the same "will be used by the Government of the Republic of the Philippines properly and exclusively for the purchase of the products of Japan or the Republic of the Philippines and the services of Japanese or Philippine nationals . . . . Clearly, as part of the covenant, the Philippine Government has expressly consented that when said Japanese nationals are involved in the supply of products or services under the grant-aid project, they shall be entitled to exemption from taxes-imposed in the Republic of the Philippines. TcEDHa It is to be noted that the tax privileges granted under the Exchange of Notes for grant-aid project are similar in all respect with the tenor of the tax privileges granted under OECF-funded projects. In Revenue Memorandum Circular No. 42-99, this Office has already set forth the applicable tax treatment of Japanese nationals participating in OECF-funded projects in the Philippines, to the satisfaction of all parties concerned. In view thereof, this Office is of the opinion that the tax treatment laid down in said RMC 42-99 is likewise applicable to the execution of Japanese Grant-Aid projects in the Philippines. In view hereof, this Office holds that, consistent with RMC 42-99, Japanese nationals are exempt from paying direct taxes, such as income tax, in connection with the supply of products and services under the Grant-Aid Project. The concerned Japanese contractors shall likewise be exempt from the 5% creditable withholding VAT imposed on government contracts. However, as laid down in RMC 42-99, since the value-added tax passed on by local contractors is in the nature of indirect tax, the Japanese nationals shall continue to bear the tax. In turn, the VAT portion shall be passed on to and be shouldered by the government agency/beneficiary of the grant which shall then pay the invoice billing of Japanese nationals with no further tax deduction and inclusive of the amount of the VAT. All other tax treatments laid down for OECF projects under RMC 42-99 shall likewise be applicable to Japanese Grant-Aid Projects. (BIR Ruling No. 043-90 dated April 13, 1998) 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 and/or any of the conditions imposed in this letter are not complied with, 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