Hanjin Heavy Industries and Construction Co., Ltd.

October 20, 2009 BIR RULING [DA-(VAT-068) 615-09] VAT Ruling No. 004-01; DA-503-04 Hanjin Heavy Industries and Construction Co., Ltd. 12th Flr., 1128 University Parkway North Bonifacio, Global City Taguig City Attention: Mr. Kwon Myung Goo General Manager/Director Gentlemen : This refers to your letter dated August 25, 2009 requesting that, in connection with the project billings for the Northrail-Southrail Linkage Project, Phase I, (the Project), your company be allowed to: 1) file your value-added tax (VAT) returns within the time prescribed by law but without payment of the tax due per return; and 2) pay the amount due thereon only upon receipt of the corresponding VAT payments from the Philippine National Railways (PNR). It is represented that Hanjin Heavy Industries and Construction Co. Ltd. (Hanjin for brevity) is a resident foreign corporation contracted by the PNR to undertake the civil aspects of the Project which involves the rehabilitation of the section of the PNR line from Caloocan to Alabang. The Project is being funded by a mixed credit facility granted by the Economic Development Fund (EDCF) of the Government of Korea and the Export-Import Bank of Korea (KEXIM) by way of Loan Agreement No. PHI-7 signed on May 7, 2004 by and between the PNR, Republic of the Philippines, as the "Borrower" and the KEXIM as the "Lender". The following are the relevant provisions of the Loan Agreement concerning taxes: "Part 7, Section 18 which provides that "Any and all sums payable by the Borrower under the Loan Agreement shall be paid in full, without set-off or counterclaim or any restriction or condition, and free and clear of any tax, levy, impost, charges or other deduction or withholding of any nature", and "Part 8, Section 22, paragraph (g) which provides that: "All taxes, duties, and levies imposed in the Philippines on the Supportable Goods shall be either made exempt or borne by the Borrower. " It was further represented that in BIR Ruling No. ITAD-001-09 dated January 14, 2009, the Commissioner of Internal Revenue essentially held that the intended exemption provided in the Loan Agreement is not a direct grant of tax exemption but is achieved through assumption by the PNR of the taxes on the payments relative to the Project and the aforesaid ruling thus concluded that: ECTHIA "In view of the foregoing, this Office is of the opinion and so holds that the services rendered by Hanjin (the general contractor), and its suppliers and sub-contractors for some aspects of the civil works to PNR are not exempt from VAT. Consequently, PNR, being the herein executing entity, shall be made to assume the VAT due therefrom, pursuant to the provisions of the Loan Agreement." that PNR then acknowledged its obligation to assume the VAT liability in connection with the Project as contained in their letter dated May 8, 2009, the relevant portion of which states: "In view of the above BIR ruling, we would like to inform that PNR acknowledges its tax obligations in connection with the implementation of the above-mentioned project, and the need to reimburse the taxes already paid by Hanjin to the BIR. However, considering the financial condition of the PNR, we will request for financial assistance from the National Government, through the Department of Budget and Management (DBM), to enable us to address the problem." that finally, due to the inherent delays in the release of government funding, PNR is unable to pay the VAT amount subject of the tax assumption obligation in a timely manner, that is whenever Hanjin files the corresponding VAT returns within the time prescribed by law. Evidently, before the VAT amount due can be paid, PNR would have to wait for the corresponding release of funds from the DBM. Since the payment of the VAT is the responsibility of the executing agency of the Republic of the Philippines, and the delay in the payment thereof is not attributable to Hanjin, you now request the above-mentioned remedies. In reply, please be advised that this Office had occasion to confirm that the Northrail-Southrail Linkage Project, Phase I, as financed under a covering Loan Agreement between the Government of Korea and the Government of the Philippines is subject to VAT to be assumed by the executing government agency, which is the PNR. In previous rulings, we likewise held that since VAT and other taxes in the Loan Agreement is the responsibility of the executing agency of the Government of the Philippines, i.e. , PNR, and whatever delay (if any) in the payment thereof is attributable to the executing agency, we found similar previous requests to be meritorious. Thus, in the herein case, Hanjin is allowed to file its monthly VAT declarations and quarterly VAT returns within the time prescribed by law. In case of delay in payment by PNR of the 12% VAT, the payment of the VAT due on Hanjin's VAT declarations/returns may be extended, without imposition of penalty for late payment, provided that Hanjin shall remit the VAT due within ten (10) days following the date in which the amount intended for payment of the VAT is actually received by from PNR. (VAT Ruling No. 004-01 dated January 15, 2001; BIR Ruling No. DA-503-04 dated September 24, 2004). TAIcaD This ruling is being issued on the basis of the foregoing facts, as represented. However, if upon investigation, it will be ascertained 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