BIR Ruling [DA-167-04]

April 5, 2004 BIR RULING [DA-167-04] 22 (B); 586-96; VAT 015-02 Pea Law Office & Associates Unit 709 Cityland Mega Plaza Building ADB Avenue corner Garnet Road Ortigas Center, Pasig City Attention: Atty. Fernando Pea Gentlemen : This refers to your letter dated August 26, 2002 requesting on behalf of your clients, EQUI-PARCO CONSTRUCTION COMPANY, SUNWEST CONSTRUCTION AND DEVELOPMENT CORPORATION and ATLANTIC ERECTORS, INC., for exemption from the payment of the 8.5% creditable value-added tax and the 2% expanded withholding tax on its gross receipts derived from the project known as the Contract for the Construction and Rehabilitation of Seven (7) Feeder Ports Project Under Package D of the Social Reform Related Feeder Ports Development Project (SRRFPDP) contracted with the Department of Transportation and Communications (DOTC) and funded by the Japanese Bank for International Cooperation (JBIC-ODA) loans. It is represented that on November 19, 1999, a Joint Venture Agreement (JVA) was entered into by the above-named clients for the construction and rehabilitation of seven (7) ports namely: San Jacinto, Masbate; Aroroy, Masbate; Cataingan, Masbate; Placer, Surigao del Norte; San Sebastian, Western Samar; Mangingisda, Palawan; and Cuyo, Palawan; and that the salient feature of the Joint Venture Agreement is that "4. The parties hereby mutually bind each other to contribute to the joint ventures in a percentage equal to their respective shares in the joint venture indicated below, all the necessary capital, equipment, technical personnel, management, supervision and other efforts and resources for the proper prosecution or implementation of the project in the event that the joint venture is awarded and contracted for the said project and further bind themselves at all times during the existence of the joint venture to extend to each other their respective fullest cooperation and best efforts towards profitable construction of project in accordance with the approved plans and specifications to completed the same with approved work schedule: Name of Member Firm Percentage of Participation Equi-Parco Construction Co. 40% Sunwest Construction & Development Corp. 30% Atlantic Erectors, Inc. 30% and that in support of your request, you submitted the following documents, to wit: 1. Joint Venture Agreement dated November 19, 1999; 2. BIR Certificate of Registration of the JVA; and 3. Contract between the Republic of the Philippines, thru the DOTC, and the Joint Venture, which mentions that the contract was awarded to the joint venture after having been determined by the PBAC that its bid is reasonable and more advantageous to the government and has complied with the guidelines and procurement under the JBIC ODA Loans. In reply thereto, please be informed that under Revenue Memorandum Circular No. 42-99 dated June 21, 1999, Overseas Economic Cooperation Fund (OECF) [now Japan Bank for International Cooperation] (JBIC) funded projects are covered by the standard clauses of the Exchange of Notes between the Japanese Government and the Republic of the Philippines, viz. : "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." Revenue Memorandum Circular No. 42-09 established that under the first clause above-cited, it is the intention of the two (2) governments not to use the proceeds of the loan in the payment of all fiscal levies imposed by the Philippines. Accordingly, this Office holds that the executing government agencies should not impose the 8.5% VAT withholding prescribed in Section 114(C) of the Tax Code of 1997 relative to 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 Philippines and Japanese Governments under the Exchange of Notes might be violated. ( VAT Ruling No. 015-02 ) The fact that the above JBIC funded contract for the construction and rehabilitation of seven feeder ports project under Package D of the Social Reform Related Feeders Ports Development Project is being undertaken by a consortium composed of Filipino corporations will not invalidate the tax-free treatment of the Fund. Verily, the above-cited first clause of the Exchange of Notes is particularly directed towards the non-utilization of the loan amount in the payment of taxes and is not dependent upon the nationality of the project contractor. Hence, this Office holds that the DOTC could properly recognized the non-imposition of the 8.5% VAT withholding to the Joint Venture. ( Ibid ) With respect to the exemption from the two percent (2%) expanded withholding tax imposed under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001, this Office has consistently ruled that a joint venture or consortium formed for the purpose of undertaking construction projects, is not considered as a taxable corporation. Thus, the joint venture agreement entered into by and among Equi-Parco Construction, Sunwest Construction and Development Corporation and Atlantic Erectors, Inc. is not a taxable event. Accordingly, the gross payments made by the DOTC to the joint venture is not subject to the 2% expanded withholding tax prescribed in Section 57(B) of the Tax Code of 1997. ( BIR Ruling No. 586-96 dated December 29, 1998 cited VAT Ruling No. 015-02 ) However, each of the co-venturers are liable for the payment of their respective corporate income tax prescribed in Section 27(A) of the Tax Code of 1997 on its income derived from the aforesaid projects. Consequently, Filipino contractors performing JBIC funded projects, namely Equi Parco Construction Company, Sunwest Construction and Development Corporation and Atlantic Erectors, Inc. remain subject to the regular corporate income tax. cSIACD Finally, for purposes of VAT, the invoice billing of the joint venture shall remain subject to the 10% VAT but consistent with the Exchange of Notes, that such billings shall not be subject to the 8.5% creditable VAT under Section 114(C) of the Tax Code of 1997. Inasmuch as the tax assumption clause in the Exchange of Notes is applicable only to Japanese contractors, Filipino contractors shall not be entitled to the privilege and benefits granted to Japanese contractors but shall remain subject to the VAT based on their gross receipts derived on the services rendered under the aforesaid projects. This will therefore serve as a notice to the Department of Transportation and Communications insofar as it is concerned. 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, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service