Tax Consequence of Proposed Structure and Handling of the NAIA II Terminal Construction Project by the MTOB Consortium and Its Consortium Members

January 14, 1997 BIR RULING NO. 002-97 20 (b) 102 000-00 002-97 Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . F . G . Tagao & R . L . Tan Gentlemen : This refers to your letters dated December 21, 1995 and September 19, 1996, requesting in effect for a ruling regarding the tax consequence of the proposed structure and handling of the NAIA II Terminal Construction Project by the MTOB Consortium and its consortium members. cdta It is represented that MTOB Consortium, which consists of Mitsubishi Corporation, Tokyu Construction Co. Ltd., BF Corporation and AM Oreta & Co. Inc., has been awarded by the Manila International Airport Authority (MIAA) the contract for the construction of the NAIA II Terminal Construction Project; that Mitsubishi Corporation and Tokyu Construction Co., Ltd. are corporations duly organized and existing under the laws of Japan and duly licensed to do business in the Philippines; that BF Corporation and AM Oreta & Co., Inc. are both domestic companies and engaged in construction activities; that the NAIA II Terminal Construction Project is 75% foreign funded by the Overseas Economic Corporation Fund (OECF) of Japan and 25% in pesos as counterpart of the Philippine government; that under the funding and payment procedure, MTOB Consortium issues a Claim for Payment for the OECF Yen portion to MIAA; that MIAA in turn sends a Request for Disbursement to OECF in Japan in favor of MTOB Consortium through its OECF Philippine Office; that the Request for Disbursement is accompanied by the Claims for Payment from MTOB Consortium; that the amount requested to be disbursed should be paid to the non-resident Yen account in the Bank of Tokyo in Japan; that pursuant to the Request for Disbursement, MIAA sends a Transfer Instructions to the Bank of Tokyo in Japan for the transfer of the amount covered by the request for disbursement to the Yen account of MTOB Consortium with the Bank of Tokyo in Japan; that based on these requests, the OECF yen portion is deposited to the MTOB bank account with the Bank of Tokyo in Japan; that in the case of the OECF peso portion MTOB Consortium submits a Claim for Payment to MIAA; that MIAA in turn sends a Request For Disbursement to OECF in Japan in favor of MTOB Consortium through its OECF Philippine Office the Yen equivalent of the peso claim of MTOB Consortium; that the OECF sends the Yen equivalent to the Bangko Sentral ng Pilipinas through the Bank of Tokyo in Japan; that BSP converts the Yen into pesos and deposits the pesos to the MTOB Consortium peso account with the Bank of Tokyo Manila branch; that under the Consortium Agreement, the consortium members have their own specific scope of work for the NAIA II Terminal Construction Project although the members of the consortium are joint and solidarily liable under the contract with the Philippine government; that MTOB Consortium will open a separate bank account from which payments from the project will be deposited and from which subsequent disbursements will be made to the consortium members based on their share in the revenue for the specific scope of work undertaken by each; that each consortium member will open a separate bank account from which the payments received for the scope of work under the NAIA II Terminal Construction Project will be deposited and disbursements will be made for the costs related to its scope of work; that each consortium member will enter into separate contracts with third parties and/or sub-contractors for its scope of work and will make payment out of the funds deposited to its own bank account; that the contract will state that the party to the contract is ( name of consortium member ) as member of MTOB Consortium; that the provider of goods and/or services to the particular consortium member will issue its own VAT registered invoice and/or VAT registered official receipts in the name of the consortium member; that the invoice and/or official receipt will indicate the purchaser of the goods and/or services as follows: "Sold to (name of consortium member) as member of MTOB Consortium" that the VAT registered invoice and VAT registered official receipts will indicate that the invoice is for goods and/or services sold and/or rendered to the particular consortium member for its specific scope of work for the NAIA II Terminal Project; that the said invoice will show, among other things, as follows: Description of Articles Unit Price Total -0- -0- -0- "For the specific scope of work of (name of consortium member) for the NAIA II Terminal Construction Project II." that the VAT registered official receipts will also indicate words to this effect; that said VAT registered official receipts will state as follows: "Received the amount of __________ as payment for services to (name of consortium member) as member of MTOB Consortium for its specific scope of work." that in case of non-VAT provider of goods and/or services (not subject to VAT), the same wording should also be indicated in the registered non-VAT sales invoice and/or non-VAT official receipts; that these documentation's will be used to support the input VAT that would be claimed against the output VAT of the MTOB consortium for VAT purposes and to support the deductions of each consortium member for income tax purposes. In reply, please be informed that pursuant to Section 102(a) of the Tax Code, as amended by Republic Act no. 7716, and as implemented by Section 4.102-1 of Revenue Regulations No. 7-95, gross receipts of construction and service contractors like the MTOB Consortium are subject to VAT. (BIR Ruling No. 274-92 dated September 30, 1992). Moreover under Section 102(b)(2) of the Tax Code, as amended, and as implemented by Section 4.102-2(b)(2) of R.R. No. 7-95 as amended by R.R. No. 5-96 dated February 20, 1996 provides that services by a resident to a non-resident foreign client such as project studies, information services, engineering and architectural designs and other similar services, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP shall be subject to 0% VAT. Accordingly, although 75% of the NAIA II Terminal Construction Project is foreign funded by the OECF of Japan, gross receipts derived therefrom including the OECF portion, shall remain subject to 10% VAT since the services being performed by the residents, in this case the MTOB consortium members, are not for a non-resident foreign client but for MIAA. Gross receipts derived from the 25% peso portion of the project shall be subject to the 10% VAT also. Consequently, since MIAA is a government agency, it shall withhold the 6% creditable VAT on its gross payments to the MTOB Consortium pertaining to both the 75% foreign currency funded portion, including the OECF peso portion, and the 25% peso portion of the project pursuant to Republic Act No. 7649 and as implemented by Revenue regulations No. 10-93. (Sec. 4.110-3, R.R. No. 7-95). The subsequent disbursements to the MTOB consortium members of their share in the revenue from the NAIA II Terminal Construction Project shall no longer be subject to VAT and consequently to the 6% withholding creditable VAT since they represent the same payments by MIAA for the same sale of service already subjected to the 10% VAT and 6% withholding VAT at the MTOB consortium level. The expanded VAT law and its implementing regulations do not prohibit consortium members to enter into separate contracts or sub-contracts with third parties or sub-contractors for their respective scope of work in the NAIA II Terminal Construction Project, Section 4.104-2 of Revenue Regulations No. 7-95, however, requires that input tax credit on purchases of goods and services shall be creditable only to the purchaser of goods and services. Thus, to enable MTOB consortium to credit to its output VAT, the input VAT derived from the separate domestic purchases of goods and services by the consortium members, the invoices and/or receipts issued by the third parties or subcontractors must be issued to the MTOB consortium. Your following proposal that the invoice and/or official receipt will indicate the purchaser of the goods and/or services as follows: "Sold to (name of consortium member) as member of MTOB Consortium." that the VAT registered invoice will state as follows: Description of Articles Unit Price Total -0- -0- -0- "For the specific scope of work of ( name of consortium member ) for the NAIA II Terminal Construction Project II." and that the VAT registered official receipts will state as follows: "Received the amount of _______ as payment for services to ( name of consortium member ) as member of MTOB Consortium for its specific scope of work." is acceptable to this Office to enable the MTOB Consortium to claim the input VAT against its 10% output VAT. In addition, to support the MTOB Consortium's input tax credit, the VAT registered invoices and/or receipts issued by the third parties or sub-contractors must comply with the invoicing requirements as provided in Section 108(a) of the Tax Code, as amended. It is axiomatic that any unutilized input VAT of MTOB Consortium cannot be treated/recognized as cost by the different consortium member for income tax purposes. The unapplied input VAT of the MTOB Consortium, if any, may be the subject of a tax credit/refund pursuant to Sec. 4 106-1 of R.R. No. 7-95. Furthermore; pursuant to Section 20(b) of the Tax Code, as amended, the term corporation includes partnerships, no matter how created or organized, joint stock companies, joint accounts (cuentas en participacion), associations or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. Thus, it is our opinion that the MTOB consortium is not subject to the corporate income tax under Section 24 of the Tax Code, as amended. However, the consortium members are separately subject to the regular corporate income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. (BIR Ruling No. 10-96 dated January 23, 1996). The same contracts with third parties or sub-contractors, and the VAT and non-VAT registered sales invoices and/or official receipts will support the respective business expenses of each of the consortium member as deduction from their gross income. Finally, the gross payments to the MTOB Consortium by MIAA shall not be subject to the 1% creditable expanded withholding tax prescribed under Section 50(b) of the Tax Code, as amended, and implemented by Revenue Regulations 6-85, as amended. (BIR Ruling No. 108-90 dated May 29, 1990) 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. cdti Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue