BIR Ruling [DA-169-97]

April 15, 1997 BIR RULING [DA-169-97] Pambansang Korporasyon sa Elektrisidad cor. Quezon Avenue & Agham Road Diliman, Quezon City Attention: Mr . Guido Alfredo A . Delgado Gentlemen : This refers to your letter dated June 20, 1996 stating that a Contract for the Engineering, Supply, Construction, Installation, Testing and Commissioning of Stage I of the Two (2) x 300 MW Masinloc Coal-Fired Thermal Power Project at Masinloc, Zambales (Contract No. Sp90DLs-969) was entered into on October 19, 1994 by and between NPC and Mitsubishi Corporation; that pursuant to Article VII of the Contract, NPC assumed the payment of certain forms of taxes, in connection with the Construction/Erection/Installation/Works portion, thus "All forms of taxes (including the Value-Added Tax), duties, tariffs, fees, imposts and other charges that may be imposed by the Philippine Government, for any of its agencies and political subdivisions which are directly related to the Contract shall be assured by NPC except corporate income tax, income tax of CONTRACTOR'S personnel, taxes imposed on local subcontractors, licenses, permits, etc., that with respect to the Supply Portion, NSC likewise assumed payment of all present and future taxes, duties, tariffs, fees, imposts, excise and other taxes that may be imposed by the Philippine Government or any of its agencies and political subdivision on the imported materials, equipment and supplies to be supplied to NPC under the Contract; that the assumption by NPC of the payment of any other tax, duty, tariff, fees, imposts of any kind that may be imposed or charged to the Contractor in connection with the Contract is made pursuant to Sections 8 (b) and 13 of Republic Act No. 6395, as amended, otherwise known as the Revised NPC Charters; that the Contract is financed under the loans obtained from the Asian Development Bank (ADB) in the amount of US$200.00 Million and the Export-import Bank of Japan in Japanese Yen equivalent to US$150.00 Million (Loan No. 1042-PHI); and that by virtue of Sections 8(b) and 13 of R.A. No. 6395, as amended, NPC assumed the payment of all forms of taxes, including the value added tax which may be imposed against Mitsubishi Corporation but passed on to NPC. cdta In connection therewith, you are requesting for a ruling to the effect that NPC and Mitsubishi Corporation are exempt from the payment of the value-added tax arising from the Contract for the Project. In reply thereto, please be informed that Section 8 of R.A. 6395, as amended otherwise known as the NPC Charter provides in part as follows: "The loans, credits and indebtedness contracted under this subsection and the payment of the principal interest and other charges thereon, as well as the importation of machinery, equipment, materials, supplies and services, by the Corporation, paid from the proceeds of any loans, credit or indebtedness incurred under this Act, shall also be exempt from all direct and indirect taxes, fees, imposts, other charges and restrictions, including import restrictions, previously and presently imposed, and be imposed by the Republic of the Philippines or any of its agencies and political subdivisions." That Section 13 of R.A. 6395, as amended likewise provides as follows: ". . . the Corporation, including its subsidiaries is hereby declared exempt from the payment of all forms of taxes, duties, fees, imposts as well as costs and service fees including filing fees, appeals, bonds, supersedeas bonds, in any court or administrative proceedings." Under the aforementioned contract NPC has assumed the payment of all taxes, duties, tariffs, fees, imposts, excise and charges of any kind that may be imposed by the Philippine Government, its subdivisions or any of its agencies or instrumentalities on, or in connection with the importation of the imported materials, equipment and supplies that may be imposed on or chargeable to Mitsubishi Corporation in connection with the Project. The 10% VAT is a tax upon any person who, in the course of business sells, barters or exchange of goods, renders services or engages in similar transactions be upon any person who imports goods (Sec. 99, NIRC). In the instant case, its your contractor i.e., Mitsubishi Corporation that is liable for the payment of the VAT. Mitsubishi Corporation's liability to pay for its taxes may not be transferred to another person with binding effect on the BIR. Thus, NPC's contract under which it assumed responsibility for the taxes due from Mitsubishi Corporation cannot legally bind the Government. It may only be binding between NPC and Mitsubishi Corporation in their respective private capacities. cdt Section 8 of the NPC Charter only exempts from taxation (i) the loan contract and the payment of the principal, interests, and other charges thereon; and (ii) the NPC's importations paid from the proceeds of the loan incurred. There is nothing in Section 8 of the said NPC charter that may exempt NPC's contractor from the payment of its taxes. There is also no provision thereunder that said contractor shall be tax exempt should the NPC assumes responsibility for the said taxes. Section 13 of the said NPC Charter, likewise, only exempts from taxation, the NPC and its subsidiaries. In like manner, there is no provision thereunder that the NPC contractor shall be exempted from taxation should the NPC assumes responsibility for such taxes. Accordingly, the said provision of the NPC Charter may not be relied upon for purpose of making its contractor, Mitsubishi Corporation exempted from payment of its taxes, including the 10% VAT on its importations and sale of service to the NPC. However, notwithstanding the foregoing, we would like to invite your attention to the provision of Section 4-A of R.A. No. 4860, as amended by P.D. No. 150, otherwise known as the Foreign Borrowings Act, as follows: "Upon the recommendation of the Secretary of Finance, in consultation with the National Economic and Development Authority and approval of the President of the Philippines, loan agreements as well as contracts, involving the availment of or utilization of the proceeds obtained under the provisions of this Act, may provide for the exemption from taxes, charges, or other levies." Since your aforementioned project is funded from your foreign borrowings, it is suggested that you ascertain whether the said foreign loan may be considered obtained also pursuant to the Foreign Borrowings Act and, in the affirmative, whether such foreign loan agreement has a provision that your contracts, Mitsubishi Corporation shall be exempted from taxation including the 10% VAT. If this law is, likewise, not availing to your said contractor, we regret to inform you that there can be no other existing law to justify the 10% VAT exemption which you are claiming for and in behalf of your said contractor. (VAT Ruling No. 063-91 dated June 27, 1991) cdti Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head, Revenue Executive Assistant (Legal Service)