BIR Ruling [DA-522-06]

August 30, 2006 BIR RULING [DA-522-06] EEI Corporation No. 12 Manggahan Street, Bagumbayan Quezon City Attention: Mr. Gaudencio S. Hernandez, Jr. Senior Vice President & Chief Finance Officer Gentlemen : This refers to your letter dated May 9, 2006 stating that EEI Corporation is a corporation organized and existing under the laws of the Philippines; that EEI Corporation, as the contractor, has entered into a General Construction Contract with Serendra, Inc., as owner, for the construction of three (3) level basement carpark and five (5) clusters of building ranging from seven (7) storeys to seventeen (17) storeys located at 11th Avenue Fort Bonifacio, Taguig, Metro Manila; that the salient features of the said contract, among others, provide that "xxx xxx xxx "3. Contract Price: "xxx xxx xxx "b. The foregoing contract price is inclusive of VAT, overtime and other allowances. Should there be imposition of R.A. No. 9337 ["EVAT Law"] corresponding adjustment will be made based on the enabling rules promulgated as a result of judicial or official government interpretation of such E-VAT Law, such as for example, a direct increase in VAT rates or the indirect impact of the 70% cap on output VAT, and in such case, corresponding amendment to this Contract shall be issued, subject to mutual agreement and assessment by the Owner and the Contractor." "xxx xxx xxx "g. Terms of Payment: A downpayment for General Construction Works Package, in the sum of Pesos: THIRTY EIGHT MILLION NINE HUNDRED THOUSAND AND 00/100 ONLY (PHP38,900,000.00) shall be paid to the Contractor. Release of downpayment for packages other than General Construction Works Package shall be made upon award of packages, submission of signed contract and submission of required Performance and Downpayment Surety Bonds. "Monthly progress billings shall be paid by the Owner to the Contractor under the terms and conditions of GC-9:B of ALI General Conditions of Contract. The Owner shall retain an amount equal to ten (10%) percent of the amount certified for payment under each Interim Certificate and Final Account representing the Retention Amount. The release of the Retension Amount is subject to the terms and conditions of GC-10:E of ALI General Conditions of Contract." that the value-added tax (VAT) rate increase from 10% to 12% effective February 1, 2006, as amplified by Revenue Memorandum Circular (RMC) No. 7-2006, adversely affects the construction companies on construction contracts that were contracted and implemented prior to February 1, 2006 and still in progress to-date, with the refusal of project owners to accept invoices that include the 2% VAT rate increase on the ground that the construction contracts are on a "fixed lump sum price" and they do not provide for any price escalation claims. aIHSEc In connection therewith, you now request for an opinion and clarification as to whether or not the 2% VAT rate increase is applicable to all billings and invoices raised after January 31, 2006 with payments thereof, regardless of any contract conditions between the buyer and supplier of goods and services. In reply thereto, please be informed that Revenue Memorandum Order No. 8-2006 provides that "1. Tax Treatment of Services Rendered Prior to February 1, 2006 Payment of which was Received on or after February 1, 2006 Amounts due on sale of services rendered on or before January 31, 2006, payments of which are received on or after February 1, 2006, shall be considered as accrued as of January 31, 2006 subject to the following conditions: 1. Taxpayer files an Information Return on or before February 28, 2006 showing the name(s) of the contractor(s), client(s), customer(s) and the amount(s) of the contract price earned and outstanding as of January 31, 2006, containing a declaration of the obligation to pay the applicable rate of value-added tax due, if any; 2. The seller billed the unpaid amount not later than January 31, 2006, and a copy of such billing is attached to the information return required in (1) hereof; 3. The seller has recorded in his books of accounts the amount receivable as of January 31, 2006. Failure to comply with the above-stated conditions shall automatically subject the gross receipts received on or after February 1, 2006, to the 12% VAT." In the instant case, since the contract has commenced on July 14, 2005 and there is a condition in the aforesaid contract that the contract price is inclusive of VAT with the corresponding adjustment in case R.A. No. 9337 shall be fully implemented, the agreement is binding between the parties and partakes the nature of law. Accordingly, services rendered prior to January 31, 2006 and the payments made after February 1, 2006 shall be subject to the new rate of 12% VAT. However, services rendered and payments made to the contractor prior to January 31, 2006, with the conditions above-mentioned having been complied with, are deemed accrued prior to February 1, 2006 and therefore subject to the old rate of 10% VAT. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service