BIR Ruling [DA-238-06]

April 11, 2006 BIR RULING [DA-238-06] 114 (C); 57 (B); DA-257-01 Tobishima Corporation Philippine Branch Office 2nd Floor, Classica Condominium 112 H.V. dela Costa Street Salcedo Village, Makati City Attention: Mr. Tatsuji Miura Branch Manager Gentlemen : This refers to your letter dated February 20, 2006 requesting for exemption from the five (5%) percent final withholding VAT, two (2%) percent creditable withholding tax on income and thirty five (35%) corporate income tax for the "Package-111 Urgent Bridges Construction Project for Rural Development" which is funded by JBIC-ODA Financial Agreement. It is represented that Toyo Construction Co., Ltd, a company duly organized and existing under and by virtue of the laws of Japan, with principal office at 7-1, 3-chome, Kandanishiki-cho, Chiyoda-ku, Tokyo, 101-8463, Japan and with Philippine address at 4th Floor, Princess Building, 104 Esteban St., Legaspi Village, Makati City and Tobishima Corporation, a company duly organized and existing under and by virtue of the laws of Japan, with principal office at 2, Sanbancho, Chiyoda-ku, tokyo, 102-8332, Japan and with Philippine address at Unit 2A&B, 2nd Floor, Classica Condominium, 112 H.V. dela Costa St., Salcedo Village, Makati City, established and constituted by and between themselves a Joint Venture for the construction of Package III, Urgent Bridges Construction Project for Rural Development; and that in support of your request, you have submitted the following documents, viz : 1. Joint Venture Agreement; 2. Notice to all Prequalified Contractors; 3. Invitation to Prequalify/Apply for Eligibility and to Bid; and 4. Bid Proposal for Package-111 Urgent Bridges Construction Project for Rural Development. In reply, please be informed that as amplified under Revenue Memorandum Circular No. 42-99 dated June 2, 1999, OECF 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 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. TIcEDC "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 No. 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% (now 5%) creditable VAT withholding prescribed under Section 114(C) of the Tax Code of 1997 for government public works contractors undertaking OECF 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. With respect to the exemption from the 1% withholding tax, this Office has already held that, for being a joint venture or consortium formed for the purpose of undertaking construction projects, the Toyo-Tobishima Joint Venture is not considered as a taxable corporation in itself. Hence, gross payments by the Department of Public Works and Highways to the former are not subject to the expanded withholding tax prescribed under Section 57(B) of the Tax Code of 1997. (BIR Ruling No. DA-257-01 dated December 6, 2001) On the other hand, by virtue of the second clause under the Exchange of Notes cited above, the income pertaining to the project and accruing to Toyo Construction Co., Ltd. and Tobishima Corporation shall be assumed by the Department of Public Works and Highways, they being Japanese corporations doing an OECF Funded Project, thereby entitling it to the coverage of the above-cited agreement. This will, therefore, serve as the notice to the Department of Public Works and Highways insofar as it is concerned. 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. caIETS Very truly yours, Commissioner of Internal Revenue By: (SGD.) PABLO M. BASTES, JR. OIC-Head Revenue Executive Assistant Legal Service