BIR Ruling [DA-176-03]

June 5, 2003 BIR RULING [DA-176-03] 114 (C); 57 (B) VAT 24-2002 Italian-Thai Development Public Company Limited Coastal Road, Brgy. San Dionisio Paraaque City Attention: Panya Visetnut Operations Manager Manila Gentlemen : This refers to your letter dated July 23, 2002, the pertinent portion of which is quoted as follows: "We are licensed by the Securities and Exchange Commission to do business in the Philippines as a branch office of a foreign company based in Thailand, under SEC Registration No. AFO096-068. We are also a VAT-registered taxpayer engaged in the construction and repair of infrastructure/development projects covered in Republic Act No. 7718 known as the Expanded BOT (Build-Operate-Transfer) Law and projects which are foreign funded or assisted and required to undergo international competitive bidding. "On June 16, 2000, we were awarded a contract by the Department of Public Works and Highways (DPWH) to implement the construction works for Contract Package VII, Construction/Improvement of Sub-Projects in Iloilo Province, Rural Road Network Development Project II which is funded by OECF (now JBIC). "On March 28, 2001, we were awarded further, a contract to implement the construction of Contract Package I, Arterial Road Link Dev. Project, Phase IV Restoration of Dalton Pass Section (Sta. Rita Aritao Road) Nueva Ecija Nueva Viscaya, which is also funded by OECF (now JBIC). These two (2) projects are still on going." Based on the foregoing, you now request for a ruling that the executing government agencies, in this case, the DPWH should not impose the 8.5% creditable withholding VAT on JBIC-funded projects, irrespective of the nationality of the contractor. In reply, please be informed that as amplified under Revenue Memorandum Circular No. 42-99 dated June 2, 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 ." RMC No. 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 withholding VAT prescribed under Section 114(C) of the Tax 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. EHCaDS The rule now is that no 8.5% VAT withholding will be imposed on JBIC-funded projects irrespective of the nationality of the contractor. However, it should be clarified that notwithstanding the non-imposition of the advance VAT withholding, both Japanese and Filipino or non-Japanese contractors engaged in JBIC-funded projects remain subject to the normal 10% VAT by way of output tax. Public works contractors such as your company shall be allowed a presumptive input tax equivalent to one and one-half percent (1%) of the contract price with respect to government contracts only in lieu of actual input taxes therefrom pursuant to Section 11(B)(2) of the Tax Code of 1997, as implemented by Section 4.105-1(b)(2) of Revenue Regulations No. 7-95, as amended by Revenue Regulations No. 6-97. Please note that it is only the advance 8.5% VAT withholding that is connected with the non-tax utilization aspect of the loan under the first clause of the Exchange of Notes. The "tax assumption scheme", under the second clause which covers the withholding/income tax and VAT, operates only in favor of Japanese contractors or nationals as a special concession for the grant of the loan. On the other hand, the gross income payments of DPWH to your company, that are paid or payable or accrued/recorded as expense/asset in the payor's books, whichever comes first, shall be subject to 2% creditable withholding tax pursuant to Revenue Regulations No. 6-2001, as amended by Revenue Regulations No. 12-2001 (1% on payments made prior to October, 2001). Hence, your company shall be liable for the payment of income tax on any income arising from the project. The 1%/2% CWT may be used as tax credit against its income tax liability. This will, therefore, serve as the notice to the DPWH 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, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group