BIR Ruling [DA-463-04]

August 30, 2004 BIR RULING [DA-463-04] RMC 42-99 VAT Ruling 024-00 University of the Philippines Quezon City Attention: Mr. Francisco Nemenzo President Gentlemen : This refers to your letter dated May 11, 2004 requesting for a ruling as to whether or not it is possible to extend the VAT exemption privileges to the Philippine subcontractors of Japan ODA-funded University of the Philippines Information Technology Training Center Project (UP ITTC). It is represented that in a recent meeting between representatives of the Japan and Philippine Government Task Forces for the Asian Information Technology Initiative (AITI), the Japan Team brought up the issue of Value-Added Tax (VAT) Refunds for Philippine subcontractors; that during the said meeting, Mr. Yoichi Kato, Counsellor of the Japan Ministry of Economy, Trade and Industry (METI) informed the Philippine Task Force that based on a decision from the Japan Ministry of Foreign Affairs, Japan ODA is on hold until this issue has been settled; that the UP-ITTC project, which is expected to be funded by the Government of Japan starting this fiscal year and for which funds have already been allocated is gravely affected by this decision; that the UP ITTC has been endorsed by the Philippine Investment Coordination Committee as being in line with the Philippine Medium Term Development Plan and by the Information Technology and E-Commerce Council (ITECC) as a crucial project in connection with your initiatives to become a major IT hub in Asia; and that this project is supposed to start in June 2004; that the Japan METI representative who visited the University of the Philippines informed you that if you can get an official assurance by this month that Philippine subcontractors for the UP ITTC project will be exempt from VAT payment, they will be able to make an exemption from the hold order of the Japan Ministry of Foreign Affairs and proceed with the UP project. In reply, please be informed that pursuant to the pertinent provision of the Exchange of Notes between the Philippines and Japanese Governments reading 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." "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." the Japanese contractors or nationals engaged in Japan ODA project in the Philippines shall not be required to shoulder all fiscal levies or taxes associated with the project. Instead, the taxes shall be shouldered and borne by the executing government agencies. Moreover, RMC 42-99 provides that the suppliers and sub-contractors of the Japanese contractors shall bill and pass on the 10% VAT to the said Japanese contractors. The Japanese contractors, in turn, shall bill and pass the 10% VAT to the concerned executing agencies of the Philippine government. Thus, billings to the executing government agencies shall be deemed inclusive of VAT. Since, under the Exchange of Notes, the Funds shall not be used to pay for the tax, then the VAT is to be paid out of the Philippine counterpart fund. TDcAIH 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 Japan ODA 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 University of the Philippines Information Technology Training Center Project is a Japan ODA project, the University of the Philippines should not impose the 8.5% creditable VAT withholding prescribed under Section 114(C) of the Tax Code from the invoice billing of the said sub-contractors. 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 UP could properly recognize the non-imposition of the 8.5% VAT withholding from the invoice billing of the sub-contractors. TCIEcH 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 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 UP to sub-contractors is not subject to the expanded withholding tax prescribed under Section 57(B) of the Tax Code of 1997. (BIR VAT Ruling No. 024-00 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