BIR Ruling [DA-202-03]

June 30, 2003 BIR RULING [DA-202-03] 114 (C) VAT Ruling Nos. 091-02; 023-99 Hanjin Heavy Industries & Construction Co.,Ltd. 2nd Floor, Eurovilla Condominium I Corner Herrera & Legaspi Streets Legaspi Village Makati City Attention: In Yong Yong Finance Manager Gentlemen : This refers to your letter dated October 2, 2002 stating that Hanjin Heavy Industries & Construction Co.,Ltd. (formerly Hanjin Engineering and Construction Co.,Ltd.) (Hanjin),is a foreign company engaged in the construction business in the Philippines, principally on foreign-funded government projects; that on November 3, 1978, the Philippine Monetary Board approved as foreign investment the assigned capital equivalent to P35,000,000.00 received by the company from its head office, subject to certain rules and regulations of the Central Bank of the Philippines and other governmental agencies for capital investments of foreign entities; that it was registered with the Board of Investments on December 5, 1975 and was subsequently awarded construction contracts by the Philippine Government; that the ongoing projects as of December 31, 2000 are described as follows: Project Description Owners Year Started Funding Delta Flood Control DPWH 1993 Japan Bank for (Pampanga 1 & 2) International Cooperation Mass Rail Transit LRTA 1997 Japan Bank for Development (LRT- International Pkg. 2) Cooperation Mass Rail Transit LRTA 1998 Japan Bank for Development (LRT International 2, Pkg. 3) Cooperation Airport Runways DOTC 1998 Asian Development Development Bank (Davao 1) Airport Buildings DOTC 1998 Asian Development Development Bank (Davao 2) Road Improvement DPWH 1998 Asian Development Puerto Princesa- Bank JEXIM Langogan (Palawan) Circumferential DPWH 1996 Japan Bank for Road Talibon- International Candijay (Bohol) Cooperation Road Development DPWH 2000 Asian Development (Zamboanga) Bank JEXIM that the invoice billings, together with Accomplishment Reports, in which materials/supplies used and labor/services expended in the projects sent to the concerned executing agencies of the Philippine Government under these foreign-funded projects, include the 10% VAT, thereby billing and passing on the VAT to the concerned executing agencies of the Philippine government; that payments by these agencies which necessarily covers the billed materials/supplies used and labor/services rendered under the above-enumerated projects likewise includes the VAT; that the executing agencies then withheld the 8.5% creditable withholding VAT on all its payments pursuant to Section 114(C) of the Tax Code of 1997; and that as a result of the 8.5% creditable withholding VAT that had been previously withheld by these executing agencies. Hanjin has generated a substantial amount of unutilized creditable VAT since the 8.5% creditable withholding VAT and input VAT credits far exceeded Hanjin's output VAT liability. Based on the foregoing representations, you now request a ruling on the following: "(1) Whether in the computation of Hanjin's output VAT liability attributable to its Japan Bank for International Cooperation (JBIC)-funded projects, the input taxes generated from the 8.5% creditable withholding VAT and input VAT credits which include those generated from VAT-registered suppliers and subcontractors may be considered in the computation of output VAT liabilities; "(2) Whether in the computation of Hanjin's Output VAT liability attributable to its Asian Development Bank (ADB) and Export-Import Bank of Japan (JEXIM)-funded projects, the input taxes generated from the 8.5% creditable withholding VAT and input VAT credits which include those generated from VAT-registered suppliers and subcontractors may be considered in the computation of output VAT liabilities; and "(3) Whether in the computation of Hanjin's Output Vat liability attributable to its Asian Development Bank (ADB)-funded projects, the input taxes generated from the 8.5% creditable withholding VAT and input VAT credits which include those generated from VAT-registered suppliers and subcontractors may be considered in the computation of output VAT liabilities." In reply thereto, please be informed as follows: 1. Revenue Memorandum Circular (RMC) No. 42-99 provides that under the Exchange of Notes between the Japanese Government and the Republic of the Philippines on OECF Funded Projects undertaken in the Philippines Japanese contractors or nationals engaged in OECF-Funded projects shall not be required to shoulder all fiscal levies or taxes associated with the Project but instead the taxes shall be shouldered and borne by the executing government agencies. Thus, the invoice billings of the Japanese contractors with the executing government agencies are exempt from the 8.5% creditable VAT withholding prescribed under Section 114(C) of the Tax Code of 1997. On the other hand, the 10% VAT passed on by the contractors or nationals to the Japanese contractors shall in turn be passed on to the concerned executing agencies of the Philippine government. Accordingly, Japanese contractors shall file the prescribed VAT returns on gross receipts derived from OECF-funded projects, claim their input taxes from their purchases of goods, properties and services from their suppliers or subcontractors ,and shall pay the VAT thereon, after offsetting the allowable input taxes, considering that the amount intended for payment of the VAT has already been collected and received by the Japanese contractors or nationals from the executing government agencies as part of the total invoice price. With the merger of the Overseas Economic Cooperation Fund (OECF) and the Export-Import Bank of Japan (JEXIM) into a new institution, the Japan Bank for International Cooperation (JBIC) effective October 1, 1999, this Office in BIR VAT Ruling No. 091-2002 dated December 19, 2002, has extended the same privilege of the non-imposition of the 8.5% creditable VAT to non-Japanese contractors or nationals engaged in JBIC-funded project; this is so because the prohibition against utilization of the fund for payment of taxes is not dependent on the nationality of the project contractor. Thus, it was ruled that no withholding of the 8.5% VAT will be imposed on JBIC-funded projects, irrespective of the nationality of the contractor. It is clear from the foregoing that Hanjin may claim the input taxes generated from the 8.5% creditable withholding VAT as well as those generated from VAT-registered suppliers and subcontractors attributable to its JBIC-funded projects in computing its output tax liabilities. On the other hand, if Hanjin, the contractor, does not avail of the 1.5% presumptive input tax on the particular public works contract, it can credit the actual input taxes directly attributable to the particular government public works contract, passed on by sellers of taxable goods, properties and services. It should be noted that once Hanjin has availed of the 1.5% presumptive input tax on the public works contract, the same shall be irrevocable and shall disqualify it from crediting the actual input taxes on purchases of goods, properties and services directly attributable to the particular public works contract. In other words, the public works contractor has the option to avail of the 1.5% presumptive input tax or the actual input taxes for purposes of computing its output tax liabilities. 2. Article 56(1) 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. AHCaED In BIR VAT Ruling No. 23-99 dated February 25, 1999, this Office ruled that ADB is covered by the exemption provision of Section 135(c) of the Tax Code of 1997 which states that petroleum products sold to entities which are by law exempt from direct and indirect taxes are exempt from excise tax. Thus, it is entitled to a refund of specific taxes in cases where its purchases of petroleum products, beginning January 1, 1999, are made inclusive of taxes. . . . Accordingly, the computation referred to in number (1) above should likewise be made applicable to Hanjin's output VAT liability attributable to its ADB and JEXIM funded projects, with the option that for public works contract. Hanjin can either avail of the 1.5% presumptive input tax or actual input tax on its purchases of goods, properties and services directly attributable to the particular public works contract. 3. As already explained in numbers 1 and 2 above, Hanjin has the option to avail of the presumptive input tax of 1% of the contract price or the actual input taxes for purposes of computing its output tax liabilities. Thus, if Hanjin does not choose to avail of the 1 1/2% presumptive input tax on the particular public works contract, it can credit the actual input taxes directly attributable to the particular government public works contract passed on by the sellers of VATable goods, properties and services. It should be noted that as stated when Hanjin has availed of the presumptive input tax of 1 1/2% of the public works contract, the same shall be irrevocable and shall disqualify it from crediting the actual input taxes on purchases of goods, properties and services directly attributable to the particular public works contract. Very truly yours. (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group