BIR Ruling [DA-229-05]

May 19, 2005 BIR RULING [DA-229-05] BIR Ruling No. 59-89; VAT Ruling No. 007-94 Sec. 112 (B), NIRC; Rev. Regs. No. 7-95 Paragon Business Consultancy, Inc. Rm. 201 Mercantile Insurance Bldg. Gen. Luna cor. Beaterio Sts. Intramuros, Metro Manila 1002 Attention: Mr. Leandro R. Atayde, Jr. President Gentlemen : This refers to your letter dated January 11, 2005, requesting on behalf of your client, FGP Corp, for confirmation of the following: "1. The importation of parts and equipment for the construction of the San Lorenzo combined-cycle power plant in Santa Rita, Batangas made in the name of FGP Corp. in pursuance of the Deed of Agreement between Siemens AG and FGP Corp. is proper and does not violate the turnkey nature of the contract. Ownership over these imported goods is deemed transferred to FGP when the same were loaded for shipment to the Philippines pursuant to Art. 22 of the Deed of Agreement. The scope of work contemplated under the contract, to wit: " design, manufacture, supply, erection, construction, installation, completion, testing and commissioning , . . ." is divided into works to be performed by Siemens AG outside the Philippines and within the Philippines. Services and supply of parts and equipment completely designed, engineered and manufactured in Germany or abroad are considered as fully rendered and completed in respect to the offshore portion ; henceforth, the transfer of ownership to FGP must necessarily take place when the goods were loaded for shipment to the Philippines in accordance with said Article 22. Therefore, the importation of said parts and equipment in the name of FGP is proper. "2. The importation of abovementioned parts and equipment into the Philippines supplied by Siemens AG pursuant to the Deed of Agreement is subject to the 10% VAT under Sec. 107 of the Tax Code. Under the Tax Code of 1997 and existing rules, the consignee-importer shall pay the VAT. VAT paid thereon is a proper source of tax credit/refund pursuant to Sec. 112(B) of the Code. "3. Official receipts issued by the Bureau of Customs for the payment of VAT on importation of the abovementioned parts and equipment, along with other supporting importation documents are sufficient proof of the input VAT paid by FGP Corp. and shall be the basis of its claim for issuance of TCC or refund under Sec. 112(B) of the Tax Code. "4. VAT Official Receipts (ORs) containing corrections/erasures to reflect name of FGP Corp. as the correct payor are valid proof of its (FGP Corp) claim for issuance of TCC. Incidents relative thereto have been explained and accounted by Siemens, Inc. in an affidavit duly sworn and notarized. "5. Official Receipts containing alterations in the address of issuer Siemen's, Inc. will not affect FGP's claim for refund/TCC. FACTS You represented the facts as follows: The Parties FGP Corp. , a BOI-registered company with preferred pioneer status, is registered as a VAT taxpayer on March 18, 1998, under DO Control No. 3 RC0000020716 and TIN 05-011-427-000 VAT. The Bureau of Internal Revenue (BIR) has classified FGP Corp. as a large taxpayer. The company was tasked to build, own and operate the San Lorenzo Gas-Fired Combined Cycle Power Plant in the Philippines, which was erected at Brgy. Sta. Rita, Batangas City. This project has, as its primary source of fuel, natural gas from the Camago-Malampaya gas field in Palawan. The construction of the said power plant began in June 2000. Siemens AG of Germany (Siemens AG) is a foreign corporation incorporated under the laws of the Federal Republic of Germany. Siemens Inc. is a corporation organized and existing under Philippines laws. It is a subsidiary of Siemens AG. On March 18, 1999, FGP Corp. and Siemens AG entered into a Deed of Agreement particularly denominated as "Turnkey Engineering, Procurement and Construction Contract," (the "Agreement") the former as the "Employer" and the latter as the "Contractor." The scope of the work was "for the design, manufacture, supply, erection, construction, installation, completion, testing and commissioning of the 500 MW (nominal) net capacity San Lorenzo combined-cycle power plant in Santa Rita, Batangas," (the "Works"). Relevant provisions of the Deed of Agreement characterizing its turnkey nature, and other provisions in respect of parties' responsibilities and obligations the assignment of local works to Siemens, Inc., as well the responsibilities assumed pursuant thereto Undoubtedly, the stated scope of work requires performance both in the Philippines and in Germany or abroad, permitting bifurcation of the Works into two (2) portions, to wit: 1) local works ( onshore portion ) which constitute the erection, construction, installation, testing, and commissioning of the San Lorenzo Power Plant; and 2) foreign works ( offshore portion ) which constitute the design, manufacture, supply of materials, parts and equipment abroad. Since Siemens AG has no permanent establishment (PE) in the Philippines ( nor did it subsequently acquire one ), 1 it assigned/subcontracted the local works to Siemens Inc., in accordance with the provisions of Article 3.1 of the Agreement which sanctioned, subject to the approval of FGP Corp., the above assignment in respect to works originating from or would be performed in the Philippines. Siemens AG was also required to provide a guarantee of the assignee's performance of its obligations under the Agreement. The assignment was contained in a separate document, the draft deed of which was originally attached as Appendix 2.14 of the Deed of Agreement. On October 1, 1999, the parties executed Deed of Assignment No. 1 whereby, with the approval of FGP Corp., Siemens AG assigned the local works to Siemens Inc., as well as the processing of documents and release of the imported works/equipment from the Bureau of Customs (BOC) which the former had undertook to perform under the aforementioned Agreement, to wit: "Sec. 34.4 Contractor's Responsibilities . The Contractor shall, with respect to paragraphs (a), (b) and (c) below for the purposes of importation of any of the Works , act in the capacity of agent of the Employer and in such capacity shall be responsible for obtaining all import authorizations, certificates and approvals reasonably capable of being obtained having regard to applicable legislation in effect at the date of importation of which, to the best of its knowledge, the Contractor is aware (including, without limitation, the Republic of the Philippines Tariff and Customs Code as amended) in a timely manner . . . " "34.5 Clearance through Customs . The Employer shall assist the Contractor in obtaining clearance through customs of all of the Works and Contractor's Equipment and in procuring any necessary government consent to the re-export of Contractor's Equipment when it is removed from the Site. Neither the Employer's obligation nor any failure to perform such obligation shall relieve the Contractor of its obligation to obtain such clearance and consents." (Emphases supplied.) In the course of implementation of the contract, Siemens AG completed the foreign works consisting of parts and equipment , and consequently, were imported into the Philippines. The absence of PE in the Philippines of Siemens AG that would handle the delivery of completed works wholly designed and manufactured in Germany or abroad to the plant site was addressed through effective transfer of ownership under certain circumstances set forth in the Agreement, to wit: "Article 22 Ownership of Project 22.1 Ownership of the Project. The Works to be supplied pursuant to the Contract shall become the property of the Employer at whichever is the earlier of the following times : (a) when any non-imported part of the Works are delivered to Site; or (b) when any part the Works to be improved into the Republic of the Philippines is loaded for shipment to the Republic of the Philippines; or (c) when the Contractor becomes entitled to payment for the value of that part of the Works." (Underscoring supplied) You pointed out that the foregoing provisions are reflective of the intention of the parties to effect the transfer of ownership over imported parts and equipment to FGP Corp. at the place of origin or shipping points in Germany or abroad, specifically, under the foregoing subparagraph (b). On this basis, the importation of parts and equipment for the San Lorenzo Power Plant was made in the name of FGP Corp. In consideration of their respective obligations defined in the Agreement, as supplemented by Deed of Assignment No. 1, Siemens Inc., as assignee of Siemens AG, 2 processed the importation documents and handled the release of the aforementioned parts and equipment from BOC. It also paid the VAT thereon following the commitment of Siemens AG under the Agreement, to wit: "34.1 Customs and Import Duties . (a) The Contractor shall be responsible for the payment of all duties and taxes, import duties and/or import surcharges, withholding tax on imports and sales tax imposed on or as a consequence of the importation of any of the Works and Contractor's Equipment into the Republic of the Philippines for purposes of the Contract. . . ." The VAT advanced by Siemens Inc. was later reimbursed by FGP Corp. pursuant to the following, viz : "34.2 Reimbursement Duties and Taxes . Subject to Clause 34.1, the Employer shall reimburse the Contractor for duties and taxes properly incurred in connection with the importation of any of the Works promptly but in any event within fifteen (15) days of notice from the Contractor of payment of such duties and taxes by the Contractor. . . " The reimbursement of the VAT paid by Siemens Inc. was also provided for Under Article 4 of the Deed of Agreement, to wit: ". . . the Contract Price is exclusive of any value added tax assessed in the Republic of the Philippines and the Employer shall only be obligated to reimburse the Contractor in respect of taxes, for value added taxes assessed in the Philippines." ( Underscoring supplied ) In its milestone billing to FGP Corp., Siemens Inc. included: i) the progress billing pertaining to local works; ii) the VAT thereon; and iii) the VAT paid on the aforesaid importations. The value of imported parts and equipment ( foreign works ) was billed separately. Furthermore, since the sale was consummated abroad, the billing did not impose VAT. [Note that ownership over the imported works (parts and equipment) was transferred at shipping point in Germany]. However, as owner-importer of the imported parts and equipment, FGP Corp. was the one liable to pay the VAT. Therefore, it had to pay Siemens Inc. for the VAT on importation advanced by the latter. This explains the inclusion in the milestone billing to FGP Corp. of VAT payments made to the BOC. The importation documents and the ORs issued by the BOC on VAT paid on said imported parts and equipment were in the name of FGP Corp. In course of audit conducted by the BIR representative, the amount of VAT paid by Siemens Inc. has been reconciled to the amount reimbursed by FGP Corp. Errors/mistakes committed by Siemens. Inc. in the course of its undertaking, and your position on the matter . Also, in the course of its undertaking as assignee of Siemens AG in respect to onshore portion of works , Siemens Inc. had committed the following: A "Several receipts issued by Siemens, Inc. pertaining to local works (the onshore portion) contained erasures particularly in the name of the payer. These official receipts initially reflected as payor First Gas Power Corporation, a company distinct and separate from FGP Corp. The errors and the corrections were admitted and confirmed by Siemens, Inc. For this purpose, Siemens Inc. executed an affidavit explaining the alterations." In this connection, you presented the following antecedent facts, together with your position on the matter. "First Gas Philippines Corp., (FGPC) is distinct from FGP Corp. The former owns the 1000MW Sta. Rita Plant while the latter owns the 500MW San Lorenzo Power Plant. Siemens, Inc., however, contracts the local works for both of these plants. In preparing some Official Receipts for payments made by FGP Corp., Siemens, Inc. mistakenly named FGPC instead of FGP Corp., as the payor. The mistake of Siemens Inc. was overlooked by FGP Corp. The mistake was realized only when FGP Corp., was preparing the documents for audit by the BIR. FGP Corp., thus requested Siemens, Inc. to correct the mistake. The mistake was fully disclosed to BIR." You submitted that such mistake is not incurable, as to prejudice FGP Corp., who has nothing to do with such mistake based on the following: 1. The mistake was committed through excusable negligence by Siemens, Inc., without any intention to evade taxes or improperly claim tax credit or refund. 2. It is not only the affidavit per se that cured the mistake. The examination and verification by the BIR show supporting documents proving that the payor to Siemens Inc. was in fact FGP Corp., and not FGPC, to wit: "First, the commercial invoices and billings supporting the erroneous Official Receipts were named to FGP Corp., and not FGPC. "Second, and the most conclusive evidence, is that the checks issued to pay for the billings and for which the OR's were issued were checks of FGP Corp., not of FGPC. "Finally, FGPC has claimed its input VAT and had been audited already. The commercial invoices and other documents were proven as not to have been claimed by FGPC, as verified through the third party audit conducted by the BIR on Siemens Inc.' B. Some of the sales invoices/official receipts issued by Siemens Inc. contained alterations to reflect its change of address to wit: Old Address: 15th/Flr., Centerpoint Bldg., J. Vargas cor. Garnet St. Ortigas Center, Pasig City TIN 005-582-782 New Address: 17th/Flr. Salcedo Tower, H.V. Dela Costa St. Salcedo Village, Makati City TIN 005-582-782 The statement you made to this effect "The only alteration in the Sales Invoices and ORs was made by Siemens Inc., and was made in good faith, and involved the alteration of the address of Siemens, Inc. This alteration was necessary to correct the wrong address put in the invoices brought about by the transfer of Siemens, Inc. of its offices to another address. It did not affect the amount of the tax credit claimed nor did it add to or detract on the propriety of the claim in any material way. Furthermore, despite the alterations, the official receipts remain authentic and in conformity with the invoicing requirements pursuant to Revenue Regulations 7-95 . . . FGP Corp. has nothing to do with the alteration. As such its claim for tax credit/refund should not be prejudiced." Within the two year prescriptive period, FGP Corp. filed its application for the issuance of Tax Credit Certificates (TCC) for excess input VAT from the procurement of capital goods and services pursuant to Section 112(B) and (C) of the Tax Code. These input VAT were incurred as a result of the construction of the electric generating power plant which is a depreciable asset with a useful life of more than one year and in pursuance of a VAT zero-rated activity. A comprehensive audit of the books of accounts of FGP Corp. has been conducted by LTAID II for the determination of the amount of input VAT for purposes of issuance of TCC. In the course of the review, the foregoing legal questions were raised. Hence, this request for legal resolution. BIR REPLY We reply as follows: 1. The importation of parts and equipment in the name of FGP Corp. is proper and in accordance with the turnkey provision of the Deed of Agreement . It appears that the BIR has previously ruled on the non taxability of Siemens AG in respect to the supply of parts and equipment for power plants which were designed, engineered, fabricated and manufactured abroad, 3 ( foreign works ). In the instant case, however, this Office is being asked to render an opinion on the matter of turnkey agreement involving foreign works. Normally, a contract on a "turnkey basis" allows transfer of ownership over any goods or property only upon completion of the works (full performance). However, the confusion arises where the contract is undertaken by a contractor who does not have a permanent establishment (PE) in the Philippines and the works requires both onshore and offshore performance. The practice is to assign the onshore portion of the project to a local contractor and the offshore portion is directly undertaken by the foreign contractor: The BIR is acquiesced of the fact that the offshore portion ( foreign works ) generally involves services for the design, fabrication, engineering and manufacture of the materials and equipment abroad, hence, solely undertaken by a non-resident contractor. In fine, the divisibility of a "turnkey contract" involving both onshore and offshore works has been affirmed and recognized by the Supreme Court. 4 Although, the decision pertains to the non imposition of contractor's tax on the contractor whose " services for the design, fabrication, engineering and manufacture of the materials and equipment were made and completed in Japan, " the Court nonetheless clarified the fact that indeed foreign works is completed separate from local works and therefore, may be delivered to the Employer-buyer of services. Moreover, the Court did not strike out the contract from being a turnkey. In the instant case, we have noted that the scope of work under the Agreement was bifurcated into two parts, i.e. , local works ( onshore portion ) and foreign works ( offshore portion ). The offshore portion relates to imported parts and equipment which were exclusively designed, engineered, fabricated and manufactured for FGP Corp. by Siemens AG. We also noted that Siemens AG has no PE in the Philippines that can handle the receipt/handling and storage of imported parts and equipment pending installation at the plant site, otherwise, the PE would have undertaken the performance of local works. Finally, whereas the local works had been assigned to Siemens Inc., its undertaking did not include the holding of title over imported parts and equipment or possession thereof. Afterall, it would be inconsistent to the nature of assignee's business if it will hold possession or title over imported finished goods which were designed, fabricated and manufactured for FGP Corp. whose ownership thereto is vested upon delivery at the shipping point. In short, to address the unique situation, the undertaking must be on a turnkey basis. On one occasion involving the same foreign contractor, this Office has ruled that income pertaining to the offshore portion is exempt from income tax and consequently, from withholding tax; and likewise, since the undertaking comprising of " design, manufacture, supply, erection, construction, installation, completion, testing and commissioning of . . . , " may be divided into foreign and local works, each portion may be made and completed separately, thereby upholding the propriety of turnkey arrangement for the completed portion. The same arrangement has been adopted in the instant case. To reiterate, turnkey arrangement requires delivery upon completion of the project ( Works ). In short, the turnkey arrangement had required Siemens AC to deliver up-front the completed works (parts and equipment) to FGP Corp. However, because it is a foreign company which has no permanent establishment (PE) in the Philippines, delivery thereof shall be made in Germany and in pursuance to Art. 1499 of the Civil Code which provides that, " the delivery of movable property may likewise be made by the mere consent or agreement of the contracting parties, if the thing sold cannot be transferred to the possession of the vendee at the time of the sale ." Under Art. 1496 of the Civil Code, such delivery of the thing sold/supplied bestows ownership to the vendee. 5 Clearly, the lack of PE of Siemens AG in the Philippines had called for a turnkey agreement which is valid under the foregoing Civil Code provisions. Thus, the issue as to whether the importations made in the name of FGP Corp violate the turnkey Agreement, we answer in the negative. The provision of Article 22 of the Agreement, supra , is conclusive of the turnkey nature of the Agreement. The turnkey provision of Article 22 of the Agreement was designed to carry out Siemens AG undertaking which comprised both local and foreign works. And since the foreign portion of works which consisted of imported parts and materials was completed, it was imperative that ownership thereof be transferred to FGP, following the concept of turnkey arrangement. In short, a turnkey arrangement requires a straightforward transfer of ownership upon completion of the works. Thus, since FGP Corp. became the owner of the imported parts and equipment at the time of loading for shipment pursuant to said Art. 22, the importation/consignment thereof under its name is proper and in accordance with the parties agreement. 2. The importation of abovementioned parts and equipment into the Philippines supplied by Siemens AG pursuant to the Deed of Agreement is subject to the 10% VAT on importation under Sec. 107 of the Tax Code of 1997. Under the law and existing rules, the consignee-importer shall pay the VAT . The importation into the Philippines from Germany of parts and equipment contemplated by the offshore portion of works is subject to the 10% VAT on importation pursuant to Sec. 107 of the Tax Code 1997, as implemented by Section 4.100-1 of Revenue Regulations (Rev. Regs.) No. 7-95. 6 The Court of Tax Appeals (CTA) has ruled 7 that VAT is the liability of the seller of goods or services and the importer; and, while there may be also no sale subject to VAT since the sale was consummated in Japan, the importation of goods by local purchasers will be subject to the 10% VAT. Accordingly, FGP Corp., as the owner-importer of the imported parts and equipment is subject to the 10% VAT on such importation; 3. We also confirm your opinion that ORs issued by the BOC for the VAT paid on the importation of the aforementioned parts and equipment, along with other supporting importation documents are sufficient proof of the input VAT paid by FGP Corp. and shall be the basis of its claim for issuance of TCC or refund under Sec. 112 (B) of the Tax Code . Sec. 4.104-5 of Rev. Regs. No. 7-95 implementing the EVAT Law requires, for purposes of substantiation of claims for input tax credit on importations, the presentation of the import entry or other equivalent document showing actual payment of VAT on the imported goods. Subject to the determination/audit by LTAID II of the BIR, the presentation of aforementioned documents, i.e. , ORs issued in the name of FGP Corp. and importation documents , shall be the basis for the issuance of a TCC being claimed pursuant to the provision of said Sec. 112(B) of the Tax Code of 1997 to wit: "SEC. 112. Refunds of Tax Credits of Input Tax . "xxx xxx xxx "(B) Capital Goods . A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased, to the extent that such input taxes have not been applied against output taxes. The application may be made only within two (2) years after the close of the taxable quarter when the importation or purchase was made." 4. On the matter of those ORs which contained corrections/erasures in order to reflect name of FGP Corp. as the correct payor Incidents related thereto have been explained and accounted by Siemens in an affidavit duly sworn and notarized. You also posited that the mistake was committed through excusable neglect which can be cured through the rule allowed under the Section 31, Rule 132 of the Rules of Court, to wit: "SEC. 31. Alterations in document, how to explain . The party producing a document as genuine which has been altered and appears to have been altered after its execution, in a part material to the question in dispute, must account for the alteration. He may show that the alteration was made by another, without his concurrence, or was made with the consent of the parties affected by it, or was otherwise properly or innocently made, or that the alteration did not change the meaning or language of the instrument. If he fails to do that, the document shall not be admitted in evidence." There was no question as to the authenticity and due execution of the subject ORs. Guided with the foregoing rule, this Office hereby rules that since corrections/erasures were made after FGP Corp. found out that the subject ORs were issued in FGPC's name and thereafter requested Siemens to correct the entry, and which the latter did, the ORs in question remain a valid proof of the transaction between FGP Corp. and Siemens, Inc. There has been a proper accounting of the alterations. 5. Official receipts containing alterations in the address of issuer Siemen, Inc. will not affect FGP's claim for refund/TCC . "SEC. 4.109-1. Change of Address of principal place of business . Whenever a VAT registered person changes his principal place of business, he should file a notice in the prescribed form within fifteen (15) days from the date such change was made. If the change of address is within the revenue district, the notification shall be filed with the Revenue District Officer in that district. However, if the change of address is from one revenue district to the to another revenue district, both Revenue District Officers should be notified by filing an application for cancellation with the former and a new application for registration with the latter. In the case if change of place of business of branches or creation of a new branch, the Revenue District Officer where his principal place of business is situated shall be notified." Under the foregoing rule, Siemens, Inc. shall have to notify both the Revenue District Officers (RDOs) concerned regarding its change of address by filing an application for cancellation with the former RDO and new application for registration with the later RDO. All matters relating to the conduct of its operation shall have a prior approval of the new RDO. The issuance of such ORs with the new business address indicated therein will not prejudice FGP's claim for TCC, there being no requirement from the buyer to verify whether the alteration made is authorized or not. However, FGP shall have to request from Siemens Inc. a copy of the clearance/approval issued by the RDO or the LTDO concerned regarding the use of said ORs. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group Footnotes 1. See BIR Ruling No. 59-89 dated April 7, 1989 which involved the name material facts as the San Lorenzo Power Plant Project. 2. Under Art. 34.4 of the Deed of Agreement, for purposes of importation, Siemens AG shall act as agent of FGP Corp. All local woks including those pertaining to importation had been assigned to Siemens, Inc. 3. BIR Ruling 59-89 dated April 7, 1989. 4. Commissioner of Internal Revenue vs. Marubeni Corporation , 372 SCRA 576. 5. Art. 1496. The ownership of the thing sold is acquired by the vendee from the moment it is delivered to him in any ways specified in Articles 1497 to 1501, or in any other manner signifying an agreement that the possession is transferred from the vendor to the vendee. 6. VAT Ruling Nos. 007-04 dated April 5, 2004; 942-03 dated September 29, 2003. 7. Kanematsu Corporation vs. Commissioner of Internal Revenue , CTA Case No. 4875, Feb. 25.