Aranas Consunji & Barleta Law Office

February 8, 2007 BIR RULING [DA-076-07] RMC 42-99; BIR Ruling DA-244-06; BIR Ruling DA 412-04; VAT Ruling 092-02 Aranas Consunji & Barleta Law Office Unit 106 G/F Le Metropole Condominium Tordesillas Corner Dela Costa Streets, Salcedo Village, Makati City Attention: Atty. Jesus Clint O. Aranas Gentlemen : This refers to your letter dated January 15, 2007, on behalf of your client, Pacific Consultants International (PCI Tokyo) requesting for confirmation of your opinion as follows: 1. Considering that foreign currency payments to PCI Tokyo, whether directly or through its subsidiary (hereinafter "PCI Philippines") in association with various resident and non-resident foreign corporations shall come from the proceeds of the loan and following the non-tax utilization aspect of the fund, DPWH, as the executing government agency, shall not withhold the 5% final withholding VAT or the 2% creditable withholding tax; 2. Considering that peso payments to PCI Tokyo, whether directly or through PCI Philippines, in association with various resident and non-resident foreign corporations shall come from the proceeds of the loan and following the non-tax utilization aspect of the fund, DPWH, as the executing government agency, shall not withhold the 5% final withholding VAT or the 2% creditable withholding tax; cCSHET 3. Distribution of payments undertaken by PCI Tokyo, whether directly or through PCI Philippines, to the corporations with which PCI Tokyo entered into an association with, regardless of residency are not subject to withholding income tax since PCI Tokyo is not a designated withholding agent; 4. Collection of VAT payments by PCI Philippines from DPWH and its subsequent distribution to the corporations with which PCI Tokyo entered into an association with does not form part of the gross receipts of PCI Philippines and hence not subject to VAT to PCI Philippines, since it is only acting as a collection agent for and in behalf of PCI Tokyo; 5. Payments or remuneration paid to Japanese nationals working for and in connection with the various projects undertaken with the DPWH are not subject to withholding taxes on compensation income following the provisions of the Exchange of Notes as implemented in Section (B) of RMC No. 42-99; 6. Considering that payments made to the corporations with which PCI Tokyo entered into an association with, both local and Japanese, operating as suppliers, contractors or consultants on and/or in connection with the various projects undertaken with the DPWH shall come from the proceeds of the loan and following the non-tax utilization aspect of the fund, DPWH, as the executing government agency, shall not withhold the withholding taxes due pursuant to the tax assumption scheme in the Exchange of Notes; and CIcTAE 7. The DPWH shall assume all taxes, income and value added tax, and all fiscal levies on the projects herein mentioned pursuant to the tax assumption scheme of the Exchange of Notes, regardless of whether the same is paid in local or foreign currency but only in so far as the said payments come from the JBIC funds. It is represented that Pacific Consultants International Tokyo (PCI Tokyo), is a corporation organized and existing under and by virtue of the laws of Japan; that PCI Tokyo, in association with various corporations both residents and, non-residents, entered into several projects (hereinafter "The Projects") with the Department of Public Works and Highways (DPWH) as follows: 1. Consultancy services for the detailed engineering design and construction supervision of the Baguio-Aritao Road Improvement Project JBIC Loan PHP205. Parties to the said project are as follows: PCI Tokyo Philipps Technical Consultants Corp (PTCC) Design Science Inc. (DSI) Urban Integrated Consultants Inc. (UICI) 2. Consultancy services for the detailed engineering design and construction supervision of the Soil Erosion Protection Project Rehabilitation of TayTay-El Nido Road Sustainable Environmental Management Project in Northern Palawan (SEMP-NP) JBIC Loan PHP225. Parties to the said project are as follows: PCI Tokyo Filipinas Dravo Corporation Philipps Technical Consultants Corp (PTCC) TCGI Engineers J.F. Cancio and Associates (JFCA) Sustainable Ecosystems International Corporation (SUSTEC) 3. Consultancy Services for the alignment study, environmental impact assessment and detailed engineering design of the Cebu North Coastal Road Project 25th yen loan package. The parties to the joint venture in respect of this project are as follows: PCI Tokyo Cebu Engineering and Development Corporation Inc. (CEDCO) Philipps Technical Consultants Corp (PTCC) 4. Consultancy Services for the review of detailed engineering design and construction supervision of Bohol Circumferential Road Improvement Project JBIC Loan PHP204. Parties to the said project are as follows: PCI Tokyo Philipps Technical Consultants Corp (PTCC) Design Science Inc. (DSI) Inter-Structure Systems Inc. (ISSI) 5. Consultancy Services for the review of detailed engineering design and construction supervision of Catarman Calbayog Via Lope De Vega and Iloilo East Coast Capiz Roads Improvement Project JBIC Loan PHP217. Parties to the said project are as follows: PCI Tokyo Philipps Technical Consultants Corp (PTCC) Design Science Inc. (DSI) Urban Integrated Consultants Inc. (UICI) J.F. Cancio and Associates (JFCA) Sustainable Ecosystems International Corporation (SUSTEC) 6. Consultancy Services for the review of detailed engineering design and construction supervision of the Laoag River Basin Flood Control and Sabo Project JBIC Loan PHP224. Parties to the said project are as follows: PCI Tokyo Yachiyo Engineering Co., Ltd. (YEC) Japan Basic Technology and Management Corp Woodward Clyde VBL Infrastructure Project Management Consultancy TCGI Engineers that the Projects are financed by a loan facility which was extended to the Department of Public Works and Highways (DPWH) by the Japan Bank for International Cooperation (JBIC); that the payment for all such projects are paid in both local and foreign currency, the latter being in Japanese Yen; that the mode of invoicing undertaken by PCI Tokyo and the corporations with which it entered into an association with include, direct invoicing to the DPWH; that for collection of payment, on the other hand, various modes have been undertaken, which include direct remittance from DPWH to PCI Tokyo or collection of payments by PCI Philippines; that PCI Philippines likewise collects the VAT payments for and in behalf of PCI Tokyo and the corporations with which it entered into an association with; that PCI Philippines is the designated collection agent of PCI Tokyo and the corporations with which it entered into an association with and as such, upon receipt of VAT payment from the DPWH, as a collection agent of PCI Tokyo and the other corporations that it entered into an association with, PCI Philippines then remits the respective portion of the project VAT payment to the said corporations; that PCI Philippines likewise undertakes the filing of the required VAT returns for an in behalf of PCI Tokyo; that the participation of PCI Philippines with PCI Tokyo in so far as all such projects are concerned, is strictly limited to acting as a collection agent of income and VAT payments; that as such, no income inures to its benefit from either the local and foreign currency payments. In support of your request, you submitted copies of the following agreements with the DPWH: 1. Consultancy services for the detailed engineering design and construction supervision of the Baguio-Aritao Road Improvement Project JBIC Loan PH P205. DEcTIS 2. Consultancy services for the detailed engineering design and construction supervision of the Soil Erosion Protection Project Rehabilitation of TayTay-El Nido Road Sustainable Environmental Management Project in Northern Palawan (SEMP-NP) JBIC Loan PH P225. aHSAIT 3. Consultancy Services for the alignment study, environmental impact assessment and detailed engineering design of the Cebu North Coastal Road Project 25th yen loan package. 4. Consultancy Services for the review of detailed engineering design and construction supervision of Bohol Circumferential Road Improvement Project JBIC Loan PH P204. 5. Consultancy Services for the review of detailed engineering design and construction supervision of Catarman Calbayog Via Lope De Vega and Iloilo East Coast Capiz Roads Improvement Project JBIC Loan PH P217. STECAc 6. Consultancy Services for the review of detailed engineering design and construction supervision of the Laoag River Basin Flood Control and Sabo Project JBIC Loan PH P224. In reply, please be informed as follows: Tax Assumption Scheme The income tax pertaining to the Project and accruing to the PCI Tokyo and such other corporations with which the former entered into an association with, shall be assumed by DPWH pursuant of the tax assumption scheme by the Republic of the Philippines or through the executing government agencies under the second clause under the Exchange of Notes between the Japanese Government and the Republic of the Philippines (Exchange of Notes) which provides that: "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." Accordingly, PCI Tokyo, through itself or its PCI Philippines shall not be made to pay any tax in relation to any payment, whether in local or foreign currency, received from The Projects. As such, the DPWH shall assume all taxes, income and value added tax, and all fiscal levies on the projects herein mentioned pursuant to the tax assumption scheme of the Exchange of Notes, regardless of whether the same is paid in local or foreign currency. The above has been enunciated by the BIR in several rulings such VAT Ruling No. 092-02 dated December 23, 2002 and VAT Ruling No. 024-2000 dated July 27, 2000. Value Added Tax and Creditable Withholding Tax Revenue Memorandum Circular (RMC) No. 42-99 dated June 2, 1999 provides that OECF Funded Projects are covered by the standard clauses of the Exchange of Notes pertinent portion of which states: "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 No. 42-99 established that under the first clause as above-stated, 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. Thus, pursuant to RMC No. 42-99 and as held in several BIR Rulings, the executing government agencies should not impose the 8.5% creditable withholding VAT prescribed under Section 114 (C) of the Tax Code of 1997 [now the 5% final withholding VAT under Section 12 of R.A. No. 9337], for government public works contractors undertaking OECF Funded Projects. Otherwise, the agreement not to subject the foreign funded projects to taxes, which is the clear intent of both the Philippine and the Japanese Governments under the Exchange of Notes, will be negated. Since The Projects are OECF-funded projects, as a consequence of non-utilization of fund for payment of fiscal levies and taxes, the Government of the Philippines through DPWH shall assume payment of taxes. It is expected that the concerned agency shall allocate a counterfund for payment of taxes imposed by the Government of the Philippines in connection with the Project. The exemption of the Fund from taxes and the undertaking by the Government of the Philippines to assume payment thereof under the Exchange of Notes, implies that the implementing agency is not required to impose the 5% final withholding VAT (then 8.5% creditable withholding VAT) nor the 2% creditable withholding tax on its gross payments to PCI Tokyo, whether directly or through PCI Philippines as well as to corporations with which they entered into an association with in connection with the Project (VAT Ruling No. 092-02 dated December 23, 2002; VAT Ruling No. 024-2000 dated July 27, 2000; BIR Ruling No. DA-036-2000 dated January 18, 2000). The DPWH shall pay the full amount billed by PCI Tokyo, whether directly or through PCI Philippines, and all corporations with which it entered into an association with which include the VAT due on the progress billing pursuant to the foregoing tax assumption scheme under the Exchange of Notes. It should be emphasized that the Project is not per se exempt from tax in the Philippines. However, pursuant to the non-utilization of the funds and tax assumption scheme under the Exchange of Notes, the Government of the Philippines through the executing agency shall shoulder the burden of such tax liability. As such, the contractors, suppliers and consultants shall have to file the necessary returns and pay the actual VAT due on the Project pursuant to RMC 42-99. PCI Tokyo, on the other hand, is not required to pay any income tax and file an income tax return on business profits derived from the Project considering that it has no permanent establishment in the Philippines. Payments to Japanese Personnel as well as to Entities Operating as Suppliers, Contractors or Consultants of PCI Tokyo Pursuant to the standard clauses under the Exchange of Notes between the Japanese Government and the Republic of the Philippines and RMC 42-99, Japanese nationals and personnel employed by PCI Tokyo in connection with The Projects are not subject to income tax/withholding tax on compensation. (BIR Ruling DA-412-04 dated July 30, 2004). In the same manner, entities, whether Japanese or Filipino, operating as supplier, contractors or consultants on and in connection with the supply of products or services are not subject to income tax/withholding tax on billings to PCI Tokyo and the corporations with which it entered into an association with, whether directly or through PCI Philippines. Accordingly, we hereby confirm your opinion that: 1. Considering that foreign currency payments to PCI Tokyo, whether directly or through its subsidiary (hereinafter "PCI Philippines") in association with various resident and non-resident foreign corporations shall come from the proceeds of the loan and following the non-tax utilization aspect of the fund, DPWH, as the executing government agency, shall not withhold the 5% final withholding VAT or the 2% creditable withholding tax; DSacAE 2. Considering that peso payments to PCI Tokyo, whether directly or through PCI Philippines, in association with various resident and non-resident foreign corporations shall come from the proceeds of the loan and following the non-tax utilization aspect of the fund, DPWH, as the executing government agency, shall not withhold the 5% final withholding VAT or the 2% creditable withholding tax; 3. Distribution of payments undertaken by PCI Tokyo, whether directly or through PCI Philippines, to the corporations with which PCI Tokyo entered into an association with, regardless of residency are not subject to withholding income tax since PCI Tokyo is not a designated withholding agent; cCTAIE 4. Collection of VAT payments by PCI Philippines from DPWH and its subsequent distribution to the corporations with which PCI Tokyo entered into an association with does not form part of the gross receipts of PCI Philippines and hence not subject to VAT to PCI Philippines, since it is only acting as a collection agent for and in behalf of PCI Tokyo; 5. Payments or remuneration paid to Japanese nationals working for and in connection with the various projects undertaken with the DPWH are not subject to withholding taxes on compensation income following the provisions of the Exchange of Notes as implemented in Section (B) of RMC No. 42-99; 6. Considering that payments made to the corporations with which PCI Tokyo entered into an association with, both local and Japanese, operating as suppliers, contractors or consultants on and/or in connection with the various projects undertaken with the DPWH shall come from the proceeds of the loan and following the non-tax utilization aspect of the fund, DPWH, as the executing government agency, shall not withhold the withholding taxes due pursuant to the tax assumption scheme in the Exchange of Notes; and 7. The DPWH shall assume all taxes, income and value added tax, and all fiscal levies on the projects herein mentioned pursuant to the tax assumption scheme of the Exchange of Notes, regardless of whether the same is paid in local or foreign currency but only in so far as the said payments come from the JBIC funds. 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 as represented are different, then this ruling shall be considered null and void. CTcSAE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service