BIR Ruling [DA-257-01]

December 06, 2001 BIR RULING [DA-257-01] Secs. 114 (C), 57 (B); 106-99 Kubota-Shimizu Joint Venture 155 Panay Avenue, South Triangle 1103 Quezon City Attention: Mr. Munenori Nishimura Kubota Corporation Gentlemen : This refers to your letter dated October 18, 2000, the pertinent portion of which is quoted as follows: "This is in connection with the METRO MANILA FLOOD CONTROL PROJECT WEST MANGAHAN FLOODWAY (MMFCP-WMF). Package 3 which is funded by Japan Bank for International Cooperation (JBIC). "In this regard, we are requesting for a BIR Ruling that Kubota Corporation/Shimizu Corporation Consortium shall be exempted from the 8.5% Creditable Withholding on VAT and also the 1.0% Creditable Expanded (Income) Tax for the above-mentioned Project. We would like to point out that similar BIR Ruling were already issued on June 2, 1999 (Revenue Memorandum Circular No. 42-99) and also on November 5, 1999 (VAT Review Committee Ruling No. 114(C)57(B) 000-00-106-99). "We are attaching the following documents for your perusal and appreciation. 1. Invitation for Pre-qualification to Tender for the construction of the Metro Manila Flood Control Project West of Mangahan Floodway, Package 3. 2. Notice of Pre-qualification Issued by Mr. Jose Espiritu, Asst. Secretary for NCR Operations. 3. Joint Venture Agreement of Kubota Corporation, Shimizu Corporation. "We are therefore requesting your good office to issue a BIR Ruling on the exemption of 8.5% Creditable Withholding on VAT and also 1.0% Creditable Expanded (Income) Tax. Kindly address also your ruling to the Department of Public Works and Highways (DPWH) so that DPWH will not get anymore confirmation from your office and DPWH can immediately implement the said exemption in the payment to the Joint Venture/Consortium of Kubota Corporation/Shimizu Corporation." Perusal of the documents submitted revealed that the said project is mainly funded by the Overseas Economic Cooperation Fund (OECF) of Japan under Loan Agreement No. PH-P179 dated March 18, 1997. 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: caHASI "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 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% 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 Kubota-Shimizu 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 is not subject to the expanded withholding tax prescribed under Section 57(B) of the Tax Code of 1997 (BIR Ruling No. DA-586-98 dated December 29, 1998). On the other hand, by virtue of the second clause under the Exchange of Notes cited above, the income tax pertaining to the project and accruing to Kubota Corporation and Shimizu 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group