Aranas Consunji & Barleta Law Offices

July 28, 2009 BIR RULING [DA-(C-153) 414-09] 28 (A) (5); 114 (C); RMC 42-99; DA-086-04; DA-096-04; DA-463-04; DA-076-07; DA-244-06 Aranas Consunji & Barleta Law Offices Unit 106 G/F Le Metropole Building Tordesillas Corner De la Costa Streets Salcedo Village, Makati City Attention: Atty. Jesus Clint O. Aranas Gentlemen : This refers to your letter dated May 25, 2009 requesting on behalf of your client, Takenaka Corporation-Japan ("Takenaka"), for confirmation of your opinion that neither Takenaka nor its Philippine Branch is liable to pay any taxes and fiscal levies in relation to the payments received arising from the construction of Bacolod-Silay Airport, a project funded by the Japan Bank of International Cooperation ("JBIC"). It is represented that Takenaka is a corporation organized and existing under the laws of Japan, with principal business address at 1-1-1-Chome, Shinsuna, Koto-ku, Tokyo 136-0075, Japan; that through its Philippine branch, Takenaka entered into an unincorporated joint venture ("JV") with Itochu Corporation ("Itochu"), another Japanese company, to undertake construction of the Bacolod-Silay Airport, which is a JBIC-funded project; that upon completion of the project, Takenaka shall recover its earnings from the said project through its branch office in the Philippines. In reply, please be informed that being a JBIC-funded project, the construction of the Bacolod-Silay Airport is covered by the standard clause of the Exchange of Notes dated April 28, 1984, between Japan and the Republic of the Philippines. The said Exchange of Notes provides for the tax treatment of participating Japanese contractors and nationals for JBIC-funded projects undertaken in the Philippines, to wit: HSIaAT "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." Revenue Memorandum Circular No. 42-99 clarified 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 of this, the BIR held in numerous rulings 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." [ See BIR Ruling No. DA-086-04 dated March 1, 2004; BIR Ruling No. DA-096-04 dated March 1, 2004; BIR Ruling No. DA-076-07 dated February 8, 2007] In connection with this, BIR Ruling No. DA-244-06 dated April 12, 2006, provides that: "It is decisively clear that the Exchange of Notes mean that the Japanese contractors or nationals engaged in JBIC-funded projects 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." Accordingly, the executing government agency may not impose the 5% withholding VAT prescribed under Section 114 (C) of the Tax Code of 1997, as amended, and as implemented by Revenue Regulations No. 16-2005, as amended, for government public works contractors undertaking JBIC-funded project such as Takenaka. With respect to the 2% withholding tax, the second paragraph of the standard clauses provides that 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 [ See BIR Ruling DA-086-04, 1 March 2004; VAT Ruling No. 024-2000, 27 July 2000]. Thus, the gross payments made by the executing government agency to Takenaka are not subject to the expanded withholding tax prescribed under Section 57 (B) of the Tax Code of 1997, as amended. As for the receipt of Takenaka through its branch office of its income derived from the JBIC-funded project, the same is likewise not subject to the BPRT imposed under Section 28 (A) (5) of the Tax Code of 1997, as amended. The transfer of amounts by Takenaka-Philippines to Takenaka-Japan does not involve any income obtained separately by Takenaka-Philippines. In fact, Takenaka-Philippines is merely acting as a "course-through" agent tasked to bring to Takenaka-Japan the income received by the latter from the JBIC-Funded project. Accordingly, since no income is separately obtained by Takenaka-Philippines, it should not be held liable for BPRT on the amounts that will be remitted to Takenaka-Japan. 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 as represented are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service