BIR Ruling [DA-407-98]

September 7, 1998 BIR RULING [DA-407-98] Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . C . P . Noel Tax Division Gentlemen : This refers to your letter dated May 15, 1998 requesting on behalf of your client, Mitsubishi Corporation Manila Branch , for a ruling regarding the tax consequences of its OECF-funded NAIA II and Calaca II Projects. LLjur It is represented that your client Mitsubishi Corporation (Mitsubishi), is a private corporation duly organized and existing under and by virtue of the laws of Japan; that Mitsubishi was duly authorized by the Securities and Exchange Commission to operate a branch in the Philippines; that Mitsubishi is the member of the MTOB Consortium, the consortium which was granted the NAIA II Project is 75% foreign-funded by the government of Japan through the OECF and 25% as counterpart fund of the Philippine Government; the funding of this project was made pursuant to an Exchange of Notes (Notes-NAIA) between the Government of Japan and the Philippines; that under Notes-NAIA, a loan in Japanese Yen up to the amount of Y47,036,000,000.00 was extended to the Philippine Government to fund, among other projects stated therein, the Ninoy Aquino International Airport Terminal 2 or the NAIA II project; that the NAIA II Project was allocated Y18,120,000,000.00; that Item 7, paragraph 2 of Notes-NAIA states: "7 . . . (2) 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 national operating as suppliers, contractors or consultant on and/or in connection with any income that may accrue from the supply of products and/or services to be provided under the Loan." It is likewise represented that on June 21, 1991, Mitsubishi entered into a contract with the National Power Corporation (NPC) for the supply of equipment and services, engineering, construction, testing and commissioning of equipment in connection with the Calaca II Project; that funding of the project is made through a grant from the Japanese Government through the OECF and pursuant to an Exchange of Notes dated June 11, 1987 (Notes-Calaca); that under the Notes-Calaca, a loan up to Y40,400,000,000.00 was extended expressly to implement the Calaca II Project; that Item 5, paragraph 2 Notes-Calaca provides: "5 . . . (2) 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 consultant on and/or in connection with any income that may accrue from the supply of products of Japan and services of Japanese nationals to be provided under the Loan." It is further represented that the above contributions of the Japanese Government through the OECF represents 75% of the NAIA II Projects and 100% of the foreign currency portion of the Calaca II project both of which will benefit not Japan but the Philippines; and that under Notes-NAIA and Notes-Calaca, any income, value added tax or the other fiscal levies that may arise therefrom should not be made the obligation of Japanese firms engaged in the Projects. In reply, please be informed that the aforequoted provisions of Notes-NAIA and Notes-Calaca are not grants of direct tax exemption privilege to the Japanese firms, Mitsubishi in this case, and Japanese nationals operating as suppliers, contractors or consultants involved in either of the two projects because the said provisions state that it is the Government of the Republic of the Philippines that is obligated to pay whatever fiscal levies or taxes they may be liable to. Thus there is no tax exemption to speak of because the said taxes shall be assumed by the Philippine Government; hence the said provision is not violative of the Constitutional prohibition against grants of tax exemption without the concurrence of the majority of the members of Congress (BIR Ruling No. 071-97 citing Sec. 28(4), Art. VI, 1987 Philippine Constitution). In view thereof, and considering that the estimated contribution of the Government of Japan is Y18,120,000,000.00 in the NAIA II Project and Y40,400,000,000.00 in the Calaca II Project and that the beneficiary is the Philippine Government, this office is of the opinion and hereby holds that Mitsubishi has no liability for income tax and other taxes and fiscal levies, including VAT, on the 75% of the NAIA II Project and on the 100% of the foreign currency portion of the Calaca II Project since the said taxes were assumed by the Philippine Government. This ruling is being issued based on the foregoing representations. If upon investigation, it will be discovered that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)