BIR Ruling [DA-492-03]

December 10, 2003 BIR RULING [DA-492-03] RMC 42-99 VAT Ruling No. 024-00 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. M.F.A. Balili Gentlemen : This refers to your letter dated July 9, 2001 requesting for a confirmation of your opinion that the payments to be received by Sumitomo Construction Company, Ltd. Philippine Branch (Sumitomo) and Cavite Ideal International and Development Corporation (Cavite) with respect to the rehabilitation project of the Calbiga-San Juanico Bridge Section in Samar Province known as Contract Package IV, is not subject to the 8.5% creditable value-added tax and to the 1% expanded withholding tax pursuant to the Exchange of Notes between the Governments of Japan and the Republic of the Philippines dated March 26, 1991 and Revenue Memorandum Circular No. 42-99. It is represented that Sumitomo, a corporation organized and existing under the laws of Japan, is duly licensed by the Securities and Exchange Commission to do business in the Philippines; that Cavite is a domestic corporation duly organized and existing under Philippine laws; that Sumitomo and Cavite formed an unincorporated joint venture to submit a joint application for bidding to undertake the rehabilitation of the Contract Package; that the joint venture was awarded this project for which it entered into an agreement with the Philippine Government through the Department of Public Works and Highways (DPWH); and that the project is funded by a loan from the Overseas Economic Cooperation Fund (OECF) and is covered by an Exchange of Notes executed by and between the Government of Japan and of the Government of the Republic of the Philippines. In reply, please be informed that 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 reads: "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 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 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 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. Since the construction of the Calbiga-San Juanico Bridge is an OECF Funded project, DPWH should not impose the 8.5% creditable VAT withholding prescribed under Section 114(C) of the Tax Code from the invoice billing of the joint venture. The fact that the Calbiga-San Juanico Bridge project is being undertaken by a Japanese corporation 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 loan amount in the payment of taxes and is not dependent upon the nationality of the project contractor concerned. Hence, this Office holds that DPWH could properly recognize the non-imposition of the 8.5% VAT withholding from the invoice billing of the joint venture. ASTcaE With respect to the exemption from the 1% (now 2% as amended by RR 6-2001) withholding tax, this Office has already held that a joint venture or consortium formed for the purpose of undertaking construction projects is not considered as a taxable corporation in itself, hence, gross payments by the DPWH to the former is not subject to the expanded withholding tax prescribed under Section 57(B) of the Tax Code of 1997. (BIR Ruling DA-586-98 dated December 29, 1998) However, each of the co-venturers is liable for the payment of their respective corporate income taxes under Sections 27 and 28 of the Tax Code of 1997 pertaining to the separate earnings each will derive from the above-mentioned projects. Hence, the Filipino contractor involved in the OECF-funded Calbiga-San Juanico Bridge Section project, Cavite Ideal International and Development Corporation, remains subject to income tax. But by virtue of the second clause under the aforecited Exchange of Notes, the income tax pertaining to the project and accruing to Sumitomo shall be assumed by DPWH since it is a Japanese corporation doing an OECF-funded project and thus, entitled to the coverage of the said agreement. (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, is 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