Applicability of VAT on Several Situations

April 12, 1989 BIR RULING NO. 073-89 102-00 000-00 073-89 Gentlemen : This refers to your letter dated June 23, 1988 stating that the Agro-Processing and Marketing Project is funded by the Asian Development Bank and implemented by the National Food Authority; that it involves, among others, the development of a grains processing center with its support facilities; and that you have contracts for the construction of its administrative support facilities and site development. Based on the foregoing facts, you now request for a ruling on the applicability of VAT in the following situations: cdtech 1. On contracts perfected before January 1, 1988 but completed after said date. 2. On contracts perfected and completed after January 1, 1988 on which the cost estimate and evaluation was prepared based on the old system of charging 4% contractor's tax and 0.45% expanded withholding tax. 3. On the basis of imputing the VAT and the 1% expanded withholding tax in the following example: Material cost P10,000.00 Overhead, Contingencies and profit 3,250.00 Labor and Equipment Cost 3,000.00 P16,250.00 ======== 4. The amount of VAT to be imposed on the contract amount. In reply, please be informed as follows: 1. Pursuant to Sec. 6(g) of Revenue Regulations No. 5-87, amounts due on contracts completed on or before December 31, 1987, payment of which are receivable on or after January 1, 1988, shall be considered accrued as of December 31, 1987 for purposes of the payment of the contractor's tax. In other words, gross receipts derived from contracts perfected and implemented on or after January 1, 1988 shall be subject to VAT even if the cost estimate of the contract did not take into account the added cost resulting from the imposition thereof. 2. With respect to contracts perfected prior to, but completed after December 31, 1987, you are subject to VAT on the total contract price but at the same time you are allowed to reduce your VAT liability by the amount of input VAT generated on materials purchased from a VAT-registered seller. Examples of cost estimates with or without the VAT being added to the cost of materials are indicated below: Estimate with Estimate without VAT on Materials VAT on Materials Material Cost P10,000.00 P10,000.00 VAT Component 1,000.00 Overhead 3,250.00 3,250.00 Labor and Equipment 3,000.00 3,000.00 VAT payable 625.00 1,625.00 P17,875.00 P17,875.00 ========= ========== 3. For purposes of determining the 1% creditable withholding tax, the tax base shall be the gross receipts embracing cost of materials, overhead costs, labor, equipment cost, etc. but exclusive of the VAT. The reason for excluding VAT from the gross receipts for purposes of determining the 1% creditable withholding tax is that it is not determinable at the time of payment. 4. The VAT applied on the contract amount is 10% pursuant to Section 102 of the Tax Code, as amended by Executive Order No. 273. Very truly yours, (SGD.) JOSE U. ONG Commissioner