BIR Ruling [DA-203-04]

April 12, 2004 BIR RULING [DA-203-04] 114 (C); VAT 024-02; VAT 080-01 Department of Public Works and Highways Office of the Secretary Manila Attention: Ms . Leonora J. Cuenca OIC Director, CFMS Gentlemen : This refers to your letter dated August 8, 2003 requesting for clarification on VAT Ruling Nos. DA 176-03 dated June 5, 2003, issued to Italian-Thai Development Public Company Limited (Italian-Thai), and DA202-03 dated June 30, 2003 issued to Hanjin Heavy Industries & Construction Co., Ltd. (Hanjin) relative to the Japan Bank for International Cooperation (JBIC) and Asian Development Bank (ADB) funded projects being undertaken by Japanese contractors/nationals or non-Japanese contractors. In the aforesaid letter, you would like to be clarified on whether or not the above-referred VAT rulings should likewise be made applicable to the following: 1. For Japanese contractors/nationals, no VAT and withholding tax deductions from contractor's billings; and 2. For non-Japanese contractors, 8.5% VAT and 2% withholding tax are deducted from the GOP portions of contractor's billings due to the underlying principle of non-utilization of the loan proceeds for local taxes. and that pursuant to the afore-cited rulings, the non-Japanese contractors of JBIC and ADB funded projects are now demanding for the refund/stoppage of deducting the 8.5% VAT and off-set the input taxes generated from the suppliers/sub-contractors and also avail of the same privilege as the Japanese contractors. 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." In interpreting the aforesaid circular, the BIR in numerous rulings held that ". . . the executing government agencies should not impose the 8.5% VAT withholding prescribed under Section 114(C) of the Tax Code of 1997 for government public works contractors undertaking JBIC Funded Projects, irrespective of the nationality of the contractor. ( VAT Ruling No . 091-02 dated December 19, 2002 ) The above-cited ruling is a reiteration of VAT Ruling No. 024-02 dated April 24, 2002, which also cited VAT Ruling No. 080-01 dated November 20, 2001, wherein this Office discussed the two (2) underlying principles governing the JBIC Funded Projects, as follows: HTScEI (1) Non-utilization of the loan for local taxes Disbursements under the loan shall be exclusively used for the approved projects and shall not be used for, nor diminished by, taxes, duties and other fiscal charges. This principle is likewise applicable to Filipino contractors/non-Japanese contractors. (2) Tax assumption scheme All direct taxes otherwise due from Japanese contractors and nationals shall be assumed by the executing government agency and/or project beneficiary. This provision is applicable only to Japanese contractors. Thus, as to the non-utilization aspect of the loan, the principle is applicable not only to Japanese contractors but also to Filipino contractors, or other nationals (non-Japanese) performing OECF (JBIC) Funded Projects since that condition is not dependent upon the nationality of the project contractor. On the other hand, the tax assumption scheme under the second clause which covers the withholding/income tax and VAT operates merely in favor of the Japanese contractors or nationals under the Exchange of Note. Accordingly, Filipino contractors or non-Japanese contractors are not exempt from income tax and withholding tax thereon, or the regular 10% VAT when undertaking OECF-funded projects. Accordingly, the above-mentioned VAT Rulings shall be applied as follows: 1. For Japanese contractors/nationals undertaking JBIC funded projects, the invoice billings of the Japanese contractors with the executing government agencies are exempt from the 8.5% creditable VAT imposed under Section 114(C) of the Tax Code of 1997. Accordingly, the executing government agencies of the Philippine government shall not withhold the 8.5% creditable VAT from the said billings of the Japanese contractors. On the other hand, since the executing government agencies assume payment of the income taxes due from the Japanese contractors or nationals by virtue of the Exchange of Notes, the 2% creditable withholding tax shall not be deducted from the income payments to the Japanese contractors or nationals. Instead, the executing government agencies shall assume the payment thereof out of their own funds. 2. The general rule under RMC No. 42-99 is that the executing government agencies should not impose the 8.5% VAT withholding prescribed in Section 114(C) of the Tax Code of 1997 for government public works contractors undertaking JBIC Funded Projects, irrespective of the nationality of the contractor. Thus, Filipino or non-Japanese contractors undertaking JBIC Funded Projects are not subject to the 8.5% VAT withholding pursuant to the non-utilization aspect of the loan under the First Clause of the Exchange of Notes. However, because of the tax assumption scheme, Filipino or non-Japanese contractors remain subject to income/withholding tax and VAT inasmuch as the said scheme operates only in favor of Japanese contractors or nationals as a special concession for the grant of the loan. IN VIEW OF THE FOREGOING, this Office holds that the non-Japanese contractors or nationals, like Hanjin and Italian Thai, undertaking JBIC or ADB Funded Projects can 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. Thus, Hanjin or Italian Thai may credit the actual input taxes directly attributable to the particular government public works contract, passed on by sellers of taxable goods, properties and services for purposes of computing its tax liabilities. Consequently, it is correct for DPWH not to subject the payments made to Hanjin or Italian Thai to the 8.5% creditable withholding VAT or the latter may claim refund for whatever erroneous taxes paid or withheld as prescribed under RMC No. 42-99. aTcIAS Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group