BIR Ruling [DA-344-04]

June 25, 2004 BIR RULING [DA-344-04] RMC 42-99 VAT Ruling 024-2000 CEDCO, Inc. 3rd Fl. GMT II Bldg. cor P. del Rosario and Junquera Sts. Cebu City Attention: Mr. Romulo M. Paredes President Gentlemen : This refers to your letter dated November 18, 2003 requesting for a ruling that the Consortium of Katahira and Engineers International (KEI), Nippon Koei Co., Ltd. (NK), TOKO Engineering Consultants (TEC), Overseas Project Management Consultants (OPMAC), CEDCO, Inc. and Filipinas Dravo Corporation (FDC) [collectively referred as the Consortium] shall be exempt from the 8.5% creditable withholding on value-added tax and likewise from the 2% creditable withholding tax pursuant to Revenue Memorandum Circular (RMC) No. 42-99. It appears that the Consortium was contracted by the Government of the Republic of the Philippines through the Metro Cebu Development Projects Office (MCDPO) for consulting, engineering, supervision and related services for the Metro Cebu Development Project Phase III (MCDP III) covering the Cebu South Reclamation and Cebu South Coastal Road Projects; and that the aforestated projects, including the fees to the consultants are financed through the Japan Bank for International Cooperation (JBIC, formerly OECF) of Japan. In reply, please be informed that under RMC No. 42-99 dated June 2, 1999, OECF (now JBIC) Funded Projects are covered by the standard clauses of the Exchange of Notes between the Japanese Government and the Republic of the Philippines, pertinent portion of which states: "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 as above-stated, 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 withholding VAT prescribed under Section 114(C) of the Tax Code of 1997, for government public works contractors undertaking 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, will be negated. Inasmuch as the Cebu South Reclamation and Cebu South Coastal Road Projects are JBIC-funded projects, MCDPO should not impose the 8.5% creditable withholding VAT prescribed under Section 114(C) of the Tax Code of 1997 from the invoice billing of the said consortium. The fact that the afore-quoted projects are being undertaken by a Consortium composed of both Japanese and Filipino corporations, 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 the loan amount in the payment of taxes and is not dependent upon the nationality of the project contractors concerned. Hence, this Office holds that MCDPO could properly recognize the non-imposition of the 8.5% VAT withholding from the invoice billing of the Consortium. With respect to the exemption from the 2% creditable 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 any income that may accrue from the supply of products and/or services to be provided under the Project Loan. Thus, the gross payments by MCDPO to the Consortium is not subject to the expanded withholding tax prescribed under Section 57(B) of the Tax Code of 1997. (VAT Ruling No. 024-2000 dated July 27, 2000) 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