Applicability of the Value-Added Tax (VAT)

July 3, 1989 BIR RULING NO. 133-89 102-00 000-00 133-89 Gentlemen : This refers to your letter dated November 8, 1988 requesting a ruling on the applicability of the value-added tax (VAT) on the amount paid by you to the contractors relative to contracts not yet completed as of December 31, 1987. It is represented that prior to January 1, 1988, you entered into a number of contracts for the construction of your infrastructure projects; that as of the date of your letter, construction work is still going on; that whereas your contract provides that the agreed contract price includes all taxes, the contractors are, in effect, billing you 7% over and above the contract price representing the 10% VAT minus the 3% contractor's tax already reflected in the contract price. Moreover, you also represented that some of the contractors are joint-venture formed by foreign and local companies whereby the VAT registration number of the local partner is being used simply because a separate registration number for the joint venture has not been obtained. Based on the foregoing facts, you posed the following questions: 1. Is PPA liable to pay 10% VAT (less the contractors tax built in the contract price) on contractors' billing involving contracts entered into prior to January 1, 1988 providing specifically that the agreed contract price includes all taxes? 2. In the event that PPA is declared liable, can PPA rightfully deduct the built-in contractors tax and the creditable input tax which the contractors are deducting from their quarterly payment. 3. Can PPA accept as sufficient compliance a VAT Registration Certificate issued by BIR not to our joint venture contractor but to the local partner company? In the Official Receipt of the joint venture, the VAT Registration Number indicated is that of the partner company. 4. These contracts involve foreign-assisted infrastructure projects, the foreign loan proceeds or the foreign (yen) counterpart is credited to the bank account of the contractors in HongKong as part payment of the contractor's billing. Is this portion subject to VAT? In reply, please be informed as follows: 1) Pursuant to Section 102 of the Tax Code, as amended by Executive Order No. 273, the seller of the service is the party who is subject to the value-added tax which can be passed on to you. Under the provision of Section 6(g)(3) of Revenue Regulations No. 5-87, amounts received on contracts completed and billed as of December 31, 1987 are considered accrued as of said date; hence, subject to the 4% contractor's tax even if paid after such date. Conversely, amounts received after December 31, 1987 on contracts not yet completed as of said date are not subject to the contractor's tax but to the value-added tax. However, the upward adjustment of the contract price due to the higher rate of the value-added tax is left to the discretion of the parties. 2) Where the amount paid by you pertains to contracts completed and billed as of December 31, 1987, you are allowed to withhold the contractor's tax from the amount you pay to the contractor. But where the amount paid pertains to contracts not yet completed, or billed as of said date, you are not allowed to withhold the value-added tax from the amount that you pay to the contractor because VAT is not yet determinable at the time of payment. Moreover, you are not allowed to deduct the creditable input VAT from the amount payable to the contractor. 3) Since a joint venture operates as a single entity to render service, said joint venture should be registered under the VAT law, as required by Section 107(a) of the Tax Code, as amended by Executive Order No. 273. (BIR Ruling No. 335-88) Accordingly, you should accept only a VAT Registration Certificate issued to the joint venture contractor and not the certificate issued to any of the partners. 4) Part of the cost of the contract which is paid with foreign loan and directly credited to the foreign co-venturer's bank account abroad still forms part of the gross receipts of the joint venture contractor which receipts are subject to VAT. In other words, that portion of the gross receipts pertaining to the foreign co-ventures is undoubtedly subject to VAT. cdtech Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner