BIR Ruling [DA-144-04]

March 29, 2004 BIR RULING [DA-144-04] RMC-42-99 DA-202-03 Hanjin Heavy Industries & Construction Co., Ltd. 2nd Floor, Eurovilla Condominium 1 Cor. Herrera & Legaspi Streets Legaspi Village, Makati City Attention: In Yong Yong Finance Manager Gentlemen : This refers to your letter dated December 29, 2003 requesting for exemption from the payment of the 8.5% creditable value-added tax and the 2% expanded withholding tax in connection with the Project of the Department of Public Works and Highways (DPWH) financed by Asian Development Bank (ADB) and Japan Bank for International Cooperation (JBIC). It is represented that the project of the Department of Public Works and Highways particularly the "Sixth Road Project, Loan No. 1473-PHI, Structural Overlay Component, contract Package MN-A, Iligan Aurora Road, Lanao del Norte/Zamboanga del Sur" is funded by ADB and JBIC. In reply, please be informed that in an unnumbered Revenue Ruling dated July 7, 1984, it has been ruled that " . . . pursuant to Section 3, Article H of the Agreement between ADB and the Government of the Republic of the Philippines, ADB is an international organization. ( BIR Ruling No. 23-99 dated February 25, 1999 ) Article 56(I) of the ADB Charter provides that "The Bank, its assets, property, income and its operations and transactions, shall be exempt from all taxation and from all customs duties. Thus, the Bank shall also be exempt from any obligation for the payment, withholding or collection of any tax or duty. Since ADB is an international organization, its funds are similar to those of an OECF Fund which under the Exchange of Notes shall not be used to pay for the tax. ( BIR Ruling No. DA-202-2003 dated June 30, 2003 ) In addition thereto, Revenue Memorandum Circular No. 42-99 dated June 2, 1999, provides that 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 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 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 Sixth Road Project, Loan No. 1473-PHI, Structural Overlay Component, contract Package MN-A, Iligan Aurora Road, Lanao del Norte/Zamboanga del Sur 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 the said joint venture. With respect to the exemption from the 2% withholding tax, this Office has already held that a joint venture or consortium formed for the purpose of undertaking construction projects is not considered as a taxable corporation in itself, hence 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. CTSHDI Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group