BIR Ruling [DA-123-04]

March 19, 2004 BIR RULING [DA-123-04] RMC 42-99; VAT Ruling No. 024-00 Hanjin Heavy Industries & Construction Co., Ltd. 2nd Floor, Eurovilla Condominium 1 Cor. Herrera & Legaspi Streets Legaspi Village, Makati City Attention: Mr. In Yong Yong Finance Manager Gentlemen : This refers to your letter dated February 11, 2004 requesting for exemption from the payment of the 8.5% creditable value-added tax and the 2% expanded withholding tax under Revenue Regulations No. 6-2001, 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 you received an Award on December 17, 2003 from the Department of Public Works and Highways (DPWH) for the implementation of the "Civil Works for Contract Package III, Reconstruction of Four (4) Bridges under Reconstruction of Bridges Arterial Roads, Phase IV, Pampanga, La Union, Ilocos Sur, Ilocos Norte Provinces Project;" that it is funded by the Japan Bank for International Cooperation (JBIC); and that according to RMC 42-99, the contractor implementing JBIC financed project is exempt from the 8.5% creditable withholding on Value-Added Tax (VAT) and the 2.0 % Creditable Expanded Withholding Tax (EWT). In reply, please be informed that, under Revenue Memorandum Circular No. 42-99 dated June 2, 1999, JBIC Funded Projects are covered by the standard clauses of the Exchange of Notes between the Japanese Government and the Republic of the Philippines, which reads. "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 8.5% creditable VAT withholding prescribed under Section 114(C) of the National Internal Revenue Code of 1997 for government public works contractors undertaking JBIC-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 Civil Works for Contract Package III, Reconstruction of Four (4) Bridges under Reconstruction of Bridges Arterial Roads, Phase IV, Pampanga, La Union, Ilocos Sur, Ilocos Norte Provinces Project is a JBIC-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 the said joint venture. DHITCc The fact that the Civil Works for Contract Package III, Reconstruction of Four (4) Bridges under Reconstruction of Bridges Arterial Roads, Phase IV, Pampanga, La Union, Ilocos Sur, Ilocos Norte Provinces Project, is being undertaken by Hanjin, a Korean 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 holds that NIA could properly recognize the non-imposition of the 8.5% VAT withholding from the invoice billing of the joint venture. With respect to the exemption from the 2% 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 Hanjin 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group