Request for Temporary Deferment of Tax Obligations Relative to the Implementation of the Environment and Natural Resources Sectoral Adjustment Loan Program

May 18, 1995 BIR RULING NO. 080-95 50 (b) 000-00 080-95 Department of Environment and Natural Resources Visayas Avenue, Diliman Quezon City Attention: Mr . Ramon P . Paje Officer In-Charge Undersecretary for Administrative and International Environment Affairs Gentlemen : This refers to your letter dated February 23, 1995 requesting in effect for a ruling temporarily deferring your tax obligations relative to your implementation of the ENR-SECAL Program. LexLib It is represented that the Environment and Natural Resources Sectoral Adjustment Loan (ENR-SECAL) Program is a World Bank assisted Program implemented by the DENR in 1992; that its objectives are to preserve the remaining biological diversity in the country, curtail illegal logging activities through effective forest protection and promote proper resources use in the uplands to foster sustainable economic development; that in 1992, DENR negotiated and signed contracts with foreign consulting firms, namely Development Alternatives, Inc. (DAI) and Pitt Witternoon and Associates, Ptd. Ltd. (PWA) to provide Technical Assistance to the ENR-SECAL Program; that during negotiations, it was agreed with the consulting firms that they are exempted from any and all taxes because of the following provisions in the NEDA Guidelines on the Procurement of consulting Services for Government Projects, Appendix F10, Article V, Section 5.01.2 (obligations of the Agency Concerned on Philippine Taxation): "The (agency concerned) agrees to seek exemption, reimburse or pay in behalf of Consultant for amounts paid on account of all taxes, duties, fees, levies, and other impositions under the laws and regulations of the Philippines or any political subdivision or agency thereof (other than personnel who are citizens or permanent residents of the Philippines) in respect of 5.01.2 any payment made to the Consultant or to the Expatriate Personnel in connection with the carrying out of the Services." that on the basis of this guidelines the consulting firms did not include tax obligations in their budgets and contracts with DENR; that to further confirm the NEDA guidelines, DENR requested NEDA's clarification of the guidelines pertinent provision; that "the provision forms part of the obligations of the client government implementing agency under standard consulting services agreement for foreign-assisted projects which exempts the consultant from such payments. However, these liabilities has still to be paid by the client implementing agency unless a special exemption has been granted by appropriate authorities such as the Department of Finance (DOF)"; that in the course of the changes in Administration in 1992, these contracts were perfected and implemented, but they were not coursed through the Management Services Office for review; that hence, no tax provision was included in the annual budget of the DENR to cover the tax obligations of the consulting firms which the DENR has agreed to shoulder; that in 1992, the consulting firms started submitting their billings to the Project Management Office (not to the Accounting Division proper) for processing and payment; that the PMO processed these billings and approved them for payment by the World Bank through the direct payment scheme; that no taxes were withheld; that the Accounting Division was furnished with copies of the billing documents only after the COA Auditor called PMO's attention to this issue; that when the Financial Management Service received the billing documents as furnished by the PMO, the tax issue surfaced; that to clarify the issued of tax exemption, Financial Management Service, DENR, wrote to BIR in March 1993 asking whether or not consulting firms hired by the DENR for its foreign-assisted projects are subject to withholding tax; that he response from BIR was a ruling in August 1994, stating that all contracts with foreign consulting firms are subject to Philippine corporate income tax and VAT; that following discussions with the consulting firms, the Department Chief Accountant strictly implemented the BIR Ruling; that taxes were deducted and remitted to BIR using the loan proceeds Special Account which, according to the DOF, have to be refunded by the GOP to comply with World Bank regulations; that Consultancy contracts are 100% eligible for expenditure under the loan, hence, they are fully funded from this source; that loan proceeds do not however, cover tax liabilities; that on the understanding that all tax liabilities incurred under the project would be met out of GOP counterpart funds, the consulting firms, which did not provided for taxes in their budgets, allege that they are suffering serious financial and operational difficulties because approximately 10% of their gross billings are eaten up by withheld taxes; that you sought the advise of the DOF to determine the relevant substance of the NEDA provision and its applicability; that DOF's letter reply of February 1, 1995 further supported the request of Foreign Consultants to be relieved of the burden of paying taxes in view of the conditions cited by DOF as follows: llcd a) Party Bearing the Tax, "The agency concerned agrees to seek exemption, reimburse or pay in behalf of the Consultant for amount paid on account on all taxes, duties, fees, and other impositions . . . in connection with the carrying out of the services. "If mutually agreed by the DENR and the foreign consultants, DENR is responsible for the payment of taxes. b) Loan proceeds cannot be used to pay taxes." Taxes are not eligible expenditures under the ENP-SECAL loan and if used for tax purposes obliges the Government to refund the same to the World Bank . . . Funds from the Special Account therefore should not be used in paying taxes." c) Taxes Form Part of Government's Counterpart Contribution. "Like other government departments implementing foreign assisted projects, DENR should include in its budget proposal the estimated taxes to be incurred by the Project during the year. Therefore, arrangements have to be made by DENR to ensure that the estimated tax obligations of the Project are budgeted and paid for. that in view of the DOF letter, your Chief Accountant consulted with the BIR Legal Office and confirmed that Foreign Consultants are not exempted from paying taxes, that nevertheless, DENR is still liable to pay the taxes imposed on the foreign consulting firms and thereby will have to work a system to include provisions for taxes in DENR's problem at the moment is the non-availability of programmed funds in 1995 and prior years to cover tax requirements for the program; that you are aware of BIR Revenue Regulations No. 1-97 which require "government offices, agencies and instrumentalities to comply strictly with the laws and regulations on withholding of Taxes", with which you are complying by using loan proceeds that must be replenished later when GOP funds are made available; that the consultants have continued undertaking major responsibilities for ENR-SECAL's forest protection objectives, such as aerial surveillance and marine operations; that these activities require large and timely cash outlays to sustain our surveillance over our forest areas; that you understand that the firms currently have outstanding billings for the past three months in anticipation of a favorable resolution of this tax issue; and that you do not wish to hamper the operations. prcd In reply thereto, please be informed that in BIR Ruling No. 123-94 dated August 4, 1994 addressed to you, this Office ruled as follows: xxx xxx xxx "Questions 1 & 2 These consultancy firms are subject to Philippine corporate income taxes. Therefore, pursuant to Section 1(b) of Revenue Regulations No. 6-85 implementing Section 50(b) in relation to Sections 24(a) and 25(a) of the Tax Code as amended, receipts of consultancy service, e.g., professional fees, talent fees, etc., by the consulting firms above- described which entered into consultancy service with you are subject to the creditable expanded withholding tax of 5% based on the gross remunerations paid for their service. This is true even if the consulting firm in local or foreign (engaged in trade or business in the Philippines) Moreover, said consultancy firms are subject to the additional withholding tax for creditable value-added tax based on 6% of gross payments, exclusive of 10% VAT, pursuant to Section 5, Revenue Regulations No. 10-93, which implemented Republic Act No. 7649 effective July 1, 993. The fact that under the payment scheme agreed by the parties, the World Bank upon your authorization directly releases the income payment to the consulting firms does not at all affect the applicability of the adverted withholding tax regulations because under said arrangement, your, as the contractee in the project, are still the income payor and therefore, the designated withholding agent World Bank, which provided the loan and released the periodic payments to the contractor did so as your agent. "Question No. 3 The temporary arrangement in the prior payment of taxes by the consulting firms through you, before the loan proceeds are released by the Word Bank to the consulting firms upon your application for withdrawal is entirely acceptable and, therefore, as in all cases involving similar arrangement, is hereby approved." Since your problem at the moment is the non-availability of programmed funds in 1995 and prior years to cover the tax requirements relative to your implementation of the ENR-SECAL Program although you will have to work out a system to include provision for taxes in your 1996 budget proposal, your request for the temporary deferment of the payment of your tax liabilities is hereby granted. However, when your tax liabilities are finally computed, the same shall be subject to the payment of interests and surcharges pursuant to Section 8(1) and (2) of Revenue Regulations No. 6-85 as amended implementing Section 50(b) of the Tax Code, as amended. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue