BIR Ruling [DA-235-04]

May 7, 2004 BIR RULING [DA-235-04] RMC 42-99; VAT Ruling No. 024-00 Office of the Chairman and Administrator Subic Bay Metropolitan Authority Bldg. 229, SBMA Center Waterfront Road, Subic Bay Freeport Zone Attention: Mr. Felicito C. Payumo Chairman and Administrator Gentlemen : This refers to your letter dated March 20, 2003 relative to tax concerns and implications regarding the JBIC-financed Subic Bay Port Development Project. It is represented that a meeting was held last March 19, 2003 between the representatives from Japan Bank for International Cooperation, the Subic Bay Metropolitan Authority and the Bureau of Internal Revenue; that it is your position that the SBMA has special tax privileges by virtue of Republic Act No. 7227 and as such is a zero-rated taxpayer; that individuals and entities transacting business with the SBMA cannot pass on the Value-Added Tax (VAT) to the SBMA; that you would likewise like to point out that the Exchange of Notes specifically and expressly states that the Government of the Republic of the Philippines will, by itself or through its executing agencies assume the tax obligations; that since the VAT cannot be passed on to the SBMA by virtue of R.A. 7227, it is the Philippine Government itself which should assume the VAT, in a manner consistent with existing laws, rules and regulations; that you do not believe that the Exchange of Notes is sufficient basis to impose the VAT on the SBMA vis--vis Republic Act No. 7227, an act of Congress; that under the JBIC-funded Port Development Project, registering the Japanese contractors for zero-rating to secure exemption from passing on the VAT to SBMA would not solve the problem; that the refund mechanism of the BIR is not readily obtainable since the conduct of an audit is a pre-requisite of the refund; that the JBIC foresees that this will take a substantial amount of time and inasmuch as this is a project with huge contract costs, the amount of tax will correspondingly be staggering; that both the contractor and SBMA may incur cash flow problems, to the detriment of the Subic Bay Port Development Project, as well as the national interest; and that the additional burden in assuming the tax by SBMA is not acceptable as it has to provide for payment of guarantee fees, principal loan repayments, interests and counterpart funds. In reply, please be informed that, under Revenue Memorandum Circular No. 42-99 dated June 2, 1999, OECF Funded Projects (now JBIC Funded Projects) are covered by the standard clauses of the Exchange Notes between the Japanese Government and the Republic of the Philippines, which reads: "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 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 OECF-funded projects (now 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 Subic Bay Port Development Project is a JBIC-Funded project, SBMA should not impose the 8.5% creditable VAT withholding prescribed under Section 114 (C) of the Tax Code from the contractor's invoice billing. The fact that the JBIC-financed Subic Bay Port Development 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 loan amount in the payment of taxes and is not dependent upon the nationality of the project contractor concerned. Hence, this Office holds that SBMA could properly recognize the non-imposition of the 8.5% VAT withholding from the invoice billing. 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 my 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 SBMA to both the Japanese contractors, its sub-contractors and Japanese employees are not subject to the expanded withholding tax and income tax, respectively, prescribed under Section 57 (B) of the Tax Code of 1997. (BIR VAT Ruling No. 024-00 dated July 27, 2000) ESTaHC 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