Tax Consequence of the Performance of an Obligation with the NPC

February 11, 1988 BIR RULING NO. 040-88 162 (c) 000-00 040-88 Gentlemen : This refers to your letter dated August 14, 1986 requesting, in behalf of your client, Burroughs Limited, a ruling as to the tax consequence of the performance by your client of its obligation with the National Power Corporation (NPC) for furnishing, delivering and installing Burroughs B5925 computer systems with peripherals, terminals and software. cdta It appears that Burroughs Limited, after winning an award through bid process, entered into a Contract on February 19, 1985 with NPC whereby for the amount of US$1,702,710.00 the former shall deliver and install the aforesaid computer equipment and systems (a) CIF NPC for the Head Office Computer System and (b) CIF NPC for the Sucat Thermal Plant in two batches; that NPC shall reimburse Burroughs for any taxes that the latter must pay based on the contract, the services or charges rendered to NPC except income tax; that NPC shall secure tax exemption from appropriate government authorities for taxes due on the work, otherwise it shall pay all forms of taxes, duties, fees, etc. including the 3% contractor's tax that may be assessed or levied against Burroughs except corporate income tax and/or individual income tax of the latter's expatriate or local employees; that Burroughs shall by way of security , retain title to the computer systems until the entire Contract price is paid and NPC shall assume full risk of loss or damage immediately upon the physical delivery of the computer systems to its designated sites. It appears also that upon the first delivery of the computer equipment, NPC with the consent of Burroughs, opened Letters of Credit for a substantial portion of the Contract price in favor of the Head Office of Burroughs in the United States; that this scheme was resorted to enable NPC to avail of the "deferred payment privilege" accorded to it by the Ministry (now Department) of Finance; that the Letters of Credit were allegedly actually funded by Burroughs, which arrangement was also disclosed to the Land Bank of the Philippines which issued the letters of Credit; that upon arrival of the computer equipment, NPC was assessed for the corresponding taxes and duties thereon; that on account of NPC's "deferred payment privilege" the equipment was released to NPC by the Bureau of Customs without payment of the taxes and duties thereon; that despite the fact that the importation was made in NPC's name, Burroughs declared the importation as part of its sales for the 1st quarter of 1986 and paid an additional sales tax on the sale of the equipment to NPC equivalent to US$93,781.80; and that Burroughs requested reimbursement from NPC of the said amount but the latter refused on the ground that it is exempt from the payment of all forms of direct and indirect taxes and cannot be held liable for the additional sales tax paid by Burroughs on the equipment. cdt On the basis of the foregoing facts, you now request a ruling on the following: 1. That the computer equipment although imported in NPC's name was sold by Burroughs in the Philippines, hence, subject to the sales tax; 2. That Burroughs is entitled to credit against the sales tax on original sale the amount of taxes levied against NPC on the importation; and 3. Burroughs is entitled to a reimbursement from NPC of the additional sales tax the former paid on the computer equipment representing the difference between the original sales tax due and the taxes assessed against NPC on the importation. In reply, I have the honor to inform you as follows: (1) Under the foregoing facts, and as stated in your letter under reply, a sale transaction involving imported computer equipment and system took place in the Philippines between your client and NPC; that in order to effect said sale, thereby discharging its obligations in the contract, your client undertook the importation; and that the importation was made under the name of NPC so as to avail of the deferred payment privileges; hence, your client is the importer-seller of said imported articles; (Collector vs. Tan Eng Hong, G.R. L-16893, October 22, 1966) subject to the advance sales tax and to the sales tax on its original sales to NPC, in accordance with Section 162(c) in relation to Section 163 of the Tax Code. (2) Under Resolution No. 16-85 of the Fiscal Incentives Review Board, the tax and duty privileges of NPC have been restored effective June 11, 1984; and that under its Resolution No. 1-86, said tax and duty exemption privilege have been restored effective July 1, 1985. However, both resolutions provide that "Commercially funded importations" are taxable. As correctly stated in your letter dated June 5, 1986 to your client, the above importation is a commercially funded importation since funds for the letter of credit were provided by your client itself. Accordingly, said importation is not exempt from the sales tax, in which case, the sales tax paid by your client cannot be granted as tax credit. (3) The question as to whether your client should be reimbursed by NPC of the additional sales tax paid by it is a matter which the parties should decide by themselves. This Office will conduct the necessary investigation to determine whether or not based in the above ruling, the corresponding taxes have been paid. cd Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner