BIR Ruling [DA-190-03]

June 17, 2003 BIR RULING [DA-190-03] RMC 42-99 VAT Ruling No. 024-00 Hanjin-Kurimoto Joint Venture 2nd Floor Eurovilla Condo I Legaspi cor Herrera Streets Legaspi Village, Makati City Attention: Mr. Akira Iwasaki Branch Manager/Resident Alien Representative Gentlemen : This refers to your letter dated March 20, 2003 in connection with the project of the National Irrigation Administration (NIA) particularly the "Bohol Irrigation Project Phase II Dam Component (BHIP 2-C-1), Construction of Bayongan Dam and Appurtenant Facilities with Supply, Delivery and Installation of Steel Gates/Valves and Discharge Pipes," which project is financed by the Japan Bank for International Cooperation (JBIC). Based on the foregoing, you now request for a ruling that the Hanjin-Kurimoto Joint Venture/Consortium (Hanjin) is not subject to the 8.5% creditable VAT and also to the 1% expanded withholding tax. In reply, please be informed that, as amplified 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 read as follows: "The government of the Republic of the Philippines will exempt the Fund from all fiscal levies or taxes impose 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 construction of the Bohol Irrigation Project Phase II Dam Component (BHIP 2-C-1), Construction of Bayongan Dam and Appurtenant Facilities with Supply, Delivery and Installation of Steel Gates/Valves and Discharge Pipes is a JBIC funded project, NIA should not impose the 8.5% creditable VAT withholding prescribed under Section 114(C) of the Tax Code on the invoice billing of Hanjin. The fact that the BHIP 2-C-1 project is being undertaken by a Japanese 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 the loan amount in the payment of taxes and is not dependent upon the nationality of the project contractor concerned. Hence, this Office is of the opinion and so holds that NIA could properly recognize the non-imposition of the 8.5% VAT withholding from the invoice billing of Hanjin. CDScaT 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 NIA 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 ) However, each of the co-venturers is liable for the payment of their respective corporate income taxes under Sections 27 and 28 of the Tax Code of 1997 pertaining to the separate earning each will derive from the above-mentioned projects. Hence, the Filipino contractors involved in the JBIC-funded BHIP 2-C-1 project, i.e. , Hanjin-Kurimoto Joint Venture/Consortium, remain subject to income tax. But by virtue of the second clause of the Exchange of Notes cited above, the income tax pertaining to the project and accruing to the Japanese corporation shall be assumed by the National Irrigation Administration since the Japanese corporation doing a JBIC-funded project is entitled to the coverage of the above-cited Agreement. 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. AaHDSI Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group