BIR Ruling No. 015-10

June 10, 2010 BIR RULING NO. 015-10 Sec. 2.57.5, RR 2-98; Sec. 4.114-2, RR 16-05; VAT Ruling No. 033-03 National Irrigation Administration National Government Center, EDSA, Diliman, Quezon City Attention: Mr. Alexander A. Reuyan OIC-Administrator Gentlemen : This refers to the letter of National Irrigation Administration (NIA) dated February 25, 2010 requesting a reconsideration of the ruling issued by the Bureau of Internal Revenue last February 17, 2010. The original request of NIA was for the exemption from the 2% EWT and 5% Final VAT on the transaction with CAMC Engineering Co., based on the Exchange of Notes and Contract of Agreement between the Government of the Philippines and People's Republic of China. As gleaned from the documents submitted, the following are the antecedent facts: 1. On February 2, 2010, NIA requested exemption from deducting 2% withholding tax and 5% final withholding VAT on all money payments to be paid by the Government of the Philippines (GOP) to the contractor relative to the contract executed by and between the NIA and China CAMC Engineering Co., Ltd. (CAMCE). The said contract is for the Construction of Re-regulating Pond Facilities for Agno River Integrated Irrigation Project in the Province of Pangasinan (ARIIP). This is jointly financed by the GOP and the People's Republic of China (PROC) under a Preferential Buyer Credit Loan Agreement entered into by the GOP and Export-Import Bank of China (China Eximbank) and Exchange of Notes. cHDaEI The Loan shall finance ninety-five percent (95%) of the Contract while the GOP shall finance the remaining five percent (5%). One condition precedent for the effectivity of the loan is for the GOP to pay CAMCE a down-payment of 5% of the contract and upon effectivity of the loan, China Eximbank shall directly deposit into CAMCE account the amount corresponding to periodic accomplishments that NIA shall endorse to the Bank for payment. 2. The contract amount is inclusive of all customs, duties, business taxes, income taxes. NIA is of the opinion that although it is mandated to deduct 2% withholding tax and 5% final VAT on all money payments to the CAMCE, it could not withhold said taxes considering that the GOP portion of 5% has already been paid as down-payment to CAMCE in compliance with the loan agreement. 3. Considering that the conditions of the loan agreement and payment procedure make China Eximbank as the direct payor of the Philippine contractual obligations to CAMCE, NIA requested that for this particular contract, it be exempted from deducting the 2% withholding tax and 5% final VAT on all money payments recommended to be paid the CAMCE and instead the latter shall pay directly to the BIR the amount of taxes corresponding to any and all amount accruing from the contract. 4. The BIR, in its letter dated February 17, 2010, replied in this wise: "In reply, NIA, which is the implementing agency, may request additional funding to the Department of Budget and Management (DBM) for a Special Allotment Release Order (SARO) equivalent to the 2% withholding tax and 5% final VAT withholding based on the grossed-up value of the contract considering that the GOP shall shoulder for these component. The tax payment from SARO should be remitted to the BIR." NIA is now requesting reconsideration of the foregoing position of the BIR and contends that Article 8 of the Loan Agreement covers taxes that may be imposed in the Republic of the Philippines on payments to be made to the Lender, that is, payment by the GOP of its obligations under the Loan Agreement to the Lender. However, NIA could not withhold the corresponding 2% withholding and 5% final VAT since the payor, China Eximbank would not give NIA the equivalent amount from the loan proceeds. Hence, it is the position of NIA that there is no strong justification or legal basis to request the DBM to release a Special Allotment Release Order (SARO) for the amount of the corresponding taxes as the total peso component of the contract has already been released to cover the 5% share of the Government of the Philippines. NIA further reiterates its request to the Bureau that for this case, it be exempted from the obligation to withhold taxes and allow CAMCE pay directly the amount of taxes due on what it shall receive from NIA or from China Eximbank. HAaDTE In reply, please be informed that Sections 2.57.3 and 4.114-2 of the same Regulations state: "SECTION 2.57.3. Persons Required to Deduct and Withhold. The following persons are hereby constituted as withholding agents for purposes of the creditable tax required to be withheld on income payments enumerated in Section 2.57.2: (A) . . . (B) . . . (C) All government offices including government-owned or controlled corporations, as well as provincial, city and municipal governments and barangays. xxx xxx xxx" "SECTION 4.114-2. Withholding of VAT on Government Money Payments and Payments to Non-Residents . (a) The government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and/or of services taxed at 12% VAT pursuant to Secs. 106 and 108 of the Tax Code, deduct and withhold a final VAT due at the rate of five percent (5%) of the gross payment thereof." Hence, NIA is constituted to be the withholding agent of the government money payments. NIA's request for exemption from the duty of withholding cannot be granted since it does not fall under any of the exemptions under Section 2.57.5 of Revenue Regulations No. 2-98, as amended. Moreover, the Exchange of Notes grants no tax exemption. Taxes shall be due on the income payments made to CAMCE. However, this Office is cognizant of the fact that the loan agreement entered into by the GOP carries a provision on the "non-utilization of the proceeds of the loan" in payment of Philippine taxes like most foreign government funded projects and grant aid agreements. This is apparent under the provisions of the Exchange of Notes between the GOP and PROC and the Loan Agreement. cAEaSC Paragraph 3 (3) of the Exchange of Notes dated February 5, 2009 is quoted hereunder: "3) In principle, the entire proceeds of the Credit shall be applied by the Borrower for the sole purpose of financing up to ninety-five percent (95%) of the total contract price of each commercial Contract. . . ." In line with this is Article 8 of the Preferential Buyer's Credit Loan Agreement which provides: "Article 8 Taxes 8.1 No deduction . All payments by the Borrower under this Agreement shall be paid in full to the Lender without set-off or counterclaim or retention and free and clear of and without any deduction or withholding for or on account of any taxes or any charges imposed in the Republic of the Philippines. In the event the Borrower is required by law to make any such deduction or withholding from any payment hereunder, then the Borrower shall forthwith pay to the Lender the full amount which would have been received hereunder, had no such deduction or withholding been made . The Borrower shall promptly forward to the Lender copies of official receipts or other evidence of payment to the relevant taxation or other authorities of any tax so deducted or withheld." (emphasis supplied) It merely provides for the assumption of tax liabilities by the Philippine Government through its government executing agency which in this case is NIA. The term "executing agency" was defined in VAT Ruling No. 033-03 dated July 7, 2003 as follows: ". . . The term "executing agency" refers to the project owner or the government agency, instrumentality or corporation beneficiary of the project and this fact is clearly established in the Exchange of Notes. As in all past and current JBIC-funded projects, it is always the concerned "executing agency" that accounts for the tax burden and this remains only effective manner of implementing the tax assumption scheme under the Exchange of Notes." CcAHEI In view of the foregoing, this Office hereby holds that the income payments to be made to CAMCE shall be subject to the 2% expanded withholding tax and 5% final VAT with NIA as the withholding agent and further affirms its earlier response to your issue and recommends coordination with the Department of Budget and Management. Very truly yours, (SGD.) JOEL L. TAN-TORRES Commissioner of Internal Revenue