BIR Ruling [DA-670-06]

November 15, 2006 BIR RULING [DA-670-06] Section 114 (C); BIR Ruling No. 010-04 Mr. Rey Asterio L. Tambis BIR Revenue District Office No. 38 Quezon Avenue, Quezon City S i r : This refers to your query on whether the Department of Environmental and Natural Resources (DENR) is liable to payment of value-added tax (VAT) on consultancy service. Documents show that on December 21, 1998, a loan agreement was executed by and between Asian Development Bank (ADB) and the DENR, representing the Government of the Philippines, whereby ADB agreed to make a loan to the DENR for the purpose of financing the Metro Manila Air Quality Improvement Sector Development Program (Project). The overall objective of the Project is to improve air quality management in the Metro Manila air shed in order to achieve improvements in air quality over the medium term. Expected benefits are improved health and positive impact on the economic and social development of Metro Manila air shed. One of the components of the Program is Ambient Air Quality QA/QC for which consultancy service is needed. The Technical Review Committee conducted the evaluation of technical proposals submitted by the bidders. On November 14, 2003, ADB approved the results of DENR's technical evaluation. The financial proposals of the complying bidders were opened on November 28, 2003. On January 29, 2004, ADB advised the DENR to proceed inviting the first ranked firm for contract negotiations. TSCIEa On April 13, 2004, a Consultant Services Contract (Contract) was entered into by and between the DENR, as executing agency on behalf of the Government, and Maunsell Environmental Management Consultants Ltd., Hong Kong (Maunsell-Hong Kong) in association with Maunsell Philippines, Inc. Under the Contract, consultants will be retained to assist DENR in enforcement and data collection activities required under the Clean Air Act to manage and control sources of pollution. The scope of work of consultants consist of two (2) components: Component 1 Develop Guidelines and Procedures; and Component 2 Support Plan Implementation. Component I will require one (1) foreign Quality Assurance (QA) expect in Manila for 3 to 4 months. The QA expert should be prepared to work closely with the Environmental Management Bureau and air quality network contractor. Local support consisting of one (1) engineer and one (1) secretary is also needed (3 to 4 man-months each). Component 2 will require at a minimum one (1) foreign Team Leader/Environmental Expert in Manila full time for the first year after all of the monitoring stations is on-line (12 man-months). Local support consisting of at least one (1) engineer and one (1) secretary is also needed over the term of the project (Part III, Terms of Reference). In reply, please be informed that Section 114(C) of the Tax Code of 1997 as amended by Republic Act (R.A.) No. 9337 and as implemented by Section 4.114-2 of Revenue Regulations (RR) No. 16-2005, amending Section 4.114 of RR No. 2-98 subjects to final withholding VAT at the rate of five percent (5%) the sale of services to the government. For this purpose, the payor or person in control of the payment shall be considered as the withholding agent. Since in this case, the contractee is a government office, it shall deduct and withhold the above-mentioned tax before making any payments to the private contractor. The government office concerned is required to withhold the 5% final tax on its gross payments pursuant to Section 114(C) of the Tax Code of 1997 as amended by R.A. No. 9337. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service