BIR Ruling [DA-066-04]

February 12, 2004 BIR RULING [DA-066-04] RMC 42-99 VAT Ruling No. 024-00 SGV & Co 6760 Ayala Avenue 1226 Makati City Attention: Atty. M. F. A. Balili Gentlemen : This refers to your letter dated July 9, 2001 requesting for a confirmation of your opinion that the payments to be received by Sumitomo Construction Company, Ltd. Philippine Branch (Sumitomo) with respect to its rehabilitation project of the San Juanico Bridge is not subject to the 8.5% creditable value-added tax and to the 1 % expanded withholding tax pursuant to the Exchange of Notes between the Governments of Japan and the Republic of the Philippines dated March 26, 1991 and Revenue Memorandum Circular No. 42-99. It is represented that Sumitomo, a corporation organized and existing under the laws of Japan, is duly licensed by the Securities and Exchange Commission to do business in the Philippines; that Sumitomo submitted a bid to undertake the rehabilitation of Calbiga-San Juanico Bridge in Samar Province, known as the Contract Package IV-A; that said contract is an Overseas Economic Cooperation Fund (OECF) funded project with the Philippine Government through the Department of Public Works and Highways (DPWH); and that the project is funded by a loan from the OECF and is covered by an Exchange of Notes executed by and between the Government of Japan and of the Government of the Republic of the Philippines. In reply, please be informed that, as amplified under Revenue Memorandum Circular No. 42-99 dated June 2, 1999. OECF Funded Projects are covered by the standard clauses of the Exchange of Notes between the Japanese Government and the Republic of the Philippines which states as follows: "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 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 8.5% creditable VAT withholding prescribed under Section 114(C) of the National Internal Revenue Code of 1997 for government public works contractors undertaking OECF-funded 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 construction of the Calbiga-San Juanico Bridge is an OECF Funded project, DPWH should not impose the 8.5% creditable VAT withholding prescribed under Section 114 (C) of the Tax Code from the invoice billing of Sumitomo. The fact that the Calbiga-San Juanico Bridge project is being undertaken by a Japanese corporation will not invalidate the tax-free treatment of the loan. Verily, the above-cited first clause of the Exchange of Notes is particularly directed towards the non-utilization of loan amount in the payment of taxes and is not dependent upon the nationality of the project contractor concerned. Hence, this Office is of the opinion and so holds that DPWH could properly recognize the non-imposition of the 8.5% VAT withholding from the invoice billing of Sumitomo. With respect to the exemption from the 1% withholding tax and pursuant to the second paragraph of the standard clauses, 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. Thus, the gross payments by the DPWH to Sumitomo is not subject to the expanded withholding tax prescribed under Section 57(B) of the Tax Code of 1997. ( BIR VAT Ruling No. 024-00 dated July 27, 2000 ) 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. STcEaI Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group