BIR Ruling [DA-514-98]

November 19, 1998 BIR RULING [DA-514-98] Tobishima Corporation 2nd Floor, Classica Condominium 112 H. V. dela Costa Street Salcedo Village Makati City Attention: Mr . Tim A . Acedo Filipino Resident Officer Gentlemen : This refers to your letter dated September 28, 1998 requesting, in effect, for a ruling that a local government unit (LGU) which is a recipient of a grant and project from the Government of Japan, can shoulder the value added tax (VAT) on the basic construction cost of a particular project. It is represented that Tobishima Corporation is a foreign construction company; that it will soon be awarded as the main contractor of a grant aid project from the Government of Japan for an LGU in the province of Benguet; that Tobishima Corporation will select and avail of the services of a capable domestic construction company for the construction and completion of the grant aid project; that the domestic construction company will charge 10% VAT to Tobishima Corporation; that the latter has no alternative but to charge the 10% VAT to the LGU; that in a grant aid project, the Government of Japan will provide/allocate funds for project particularly the basic construction cost only excluding all taxes that will be charged by the domestic construction company to Tobishima Corporation; and that it is the responsibility of the LGU to pay for all taxes that will be passed on by the domestic construction company to the main contractor and finally to be borne and shouldered by the LGU. In reply, please be informed that whenever one party to the taxable transaction exclude payment of any tax due by reason of donation (grant aid project), such as in the instant case, the other party thereto shall be the one directly liable for the tax. The issue as to who pays the tax is immaterial as long as the tax due is settled. This is corollary to the principle that whenever one party to the taxable document enjoys exemption from the tax imposed, the other party thereto who is not exempt shall be the one directly liable. Furthermore, Section 12 of Republic Act No. 8174, otherwise known as the "General Appropriation Act of 1996" provides as follows: " National Internal Revenue Taxes and Import Duties of National and Local Government Agencies . . . . National internal revenue taxes and import duties payable by national government agencies to the National Government, as well as customs duties and taxes for the importation of equipment by local government units, are deemed automatically appropriated . The amount pertaining to such taxes and duties shall be considered as revenue and expenditure of the government ." Accordingly, the concerned LGU will bear the payment of the value-added tax on the basic construction cost used/applied to the project and the said taxes are deemed automatically appropriated. (BIR Ruling No. 43-98 dated April 13, 1998) 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 from the date of issue. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)