Tax Consequences of the "Consultancy Contract between the Department of Finance on Behalf of the Government of the Republic of the Philippines and the Crown Agents for Oversea Governments and Administrations (Crown Agents/CA)"

December 11, 1997 BIR RULING NO. 136-97 21 (f), 50 (b), 103 (b) (3), 103 (q)-000-00-136-97 Philippine Tax Computerization Project Crown Agents - Project Office Room 307, Third Floor Bureau of Internal Revenue National Office Diliman, Quezon City Attention: Mr . Terry Chapman Project Director Gentlemen : This refers to your letter dated June 9, 1997 seeking for clarification from this Office on the following issues: (1) Whether Crown Agents shall register as a Withholding Agent of the Bureau of Internal Revenue; (2) Whether it shall not register as a taxpayer; (3) Whether it can be allowed to remit its tax payments under a special-check-payment arrangement; and (4) Whether its Filipino consultants are subject to VAT. Based on the "Consultancy Contract between the Department of Finance (DOF) on Behalf of the Government of the Republic of the Philippines and the Crown Agents for Oversea Governments and Administrations (Crown Agents/CA)" that you submitted to this Office and as per your representations, Crown Agents is a UK-based organization with office address at St. Nicholas House, St. Nicholas Road, Sutton, Surrey, SM1 IEL, England, handling numerous projects in different parts of the world; that some of its projects have duration of as short as two weeks and a few go beyond two years; that the subject Consultancy Agreement is under a Loan Assistance Program of the World Bank to assist in the Philippine Tax Computerization Project (PTCP) of the Bureau of Internal Revenue (BIR); that under the Project Agreement, Crown Agents has no tax liabilities with the Philippine Government; that the said Project started as a two-year contract that has now extended to five (5) years; that all transactions, including billings and payments on the Project are made by and with Crown Agents-UK (CA-UK); that to discharge its project responsibilities, Crown Agents has contracted Filipino consultants who are paid from CA-UK; that Crown Agents is in the Philippines solely for the purpose of the said Project and does not engage in selling, marketing or other business efforts; that it is your contention that Crown Agents is therefore a non-business entity in the Philippines and may not be considered as a taxpayer; that nonetheless, since it pays fees to its Filipino consultants, it had an agreement with the BIR at the inception of the said Project to withhold 10% of the Filipino consultants fees; that for this, it had been given a Tax Identification Number (TIN) and had been religiously remitting the withheld money payments to the BIR since 1992; that with the implementation of the Taxpayer Records Update (TRU) Program, it wishes to register as a Withholding Agent but not as a taxpayer in BIR-South Quezon City since it is at the BIR-National Office where it performs most of its project tasks; that it also wishes to seek waiver from the Revenue Region No. 7 regarding the new tax payment scheme requiring that tax payments should be in cash or thru a direct-debit bank scheme because it can only remit the taxes withheld under a special-check-payment arrangement since its Project Director is not authorized to open another bank account nor is he allowed to perform any bank transaction except with the CA-authorized bank, i.e., the Standard Chartered Bank in Makati; that the Bureau's loan agreement with the World Bank does not allow payment of any tax levied in the Philippines for goods and services; that under these circumstances, you consider your Filipino consultants, who are independent self-employed professionals, as exempted from VAT; that should they be required to charge VAT, it will have to pass on this charge to the BIR thru the DOF, which is the direct beneficiary of the said Project and in which case, the Bureau has to source this from its local funds. In reply thereto, please be informed as follows: (1) On whether Crown Agents shall register as a Withholding Agent of the Bureau of Internal Revenue . It appearing that Crown Agents has an existing Agreement with the BIR at the inception of the Philippine Tax Computerization Project to withhold 10% of the Filipino consultants' fees, for which purpose it had been given a TIN, and it had been religiously remitting the withheld income payments to the Bureau since 1992, the question of whether it shall or shall not register as a withholding agent is of no moment because it is in fact and legally acting as a Withholding Agent already since 1992. The fact, however, that the World Bank provided the loan and that it directly releases the income payments to Crown Agents on a periodic basis nor the fact that the Filipino consultants are being paid directly by CA-UK does not at all affect Crown Agents being a Withholding Agent of the BIR because it is in fact the income payor of the Filipino consultants under a separate contract and is fully responsible for the services performed by the Filipino consultants on its behalf. Thus, it becomes the designated Withholding Agent of the Bureau thru the Crown Agents Project Office located at Room 307, Third Floor, BIR National Office Bldg., Diliman, Quezon City. (2) On whether Crown Agents shall register as a taxpayer . Paragraph 1.9 of the Consultancy Contract between the DOF and the Crown Agents provides, viz: "1.9 Taxes and Duties "The client warrants that the Consultant and the Foreign Personnel shall be exempt from any taxes , duties , levies and other impositions imposed, under the applicable law, on the Consultant and the Foreign Personnel in respect of: "(a) any payments whatsoever made to the Consultant or the Foreign Personnel ( other than the nationals of the Government or permanent residents of the Government ' s country ), in connection with the carrying out of the Services ; "(b) . . ." (Emphases supplied.) This provision in the subject Consultancy Contract is validated under Section 4-A of Republic Act No. 4860, as amended by Presidential Decree No. 150, otherwise known as the "Foreign Borrowing Act", which provides as follows: "Sec. 4-A. Upon the recommendation of the Secretary of Finance , in consultation with the National Economic and Development Authority and approval of the President of the Philippines, loan agreements, as well as contracts involving the availment of or utilization of the proceeds of loans , credits or indebtedness obtained under the provisions of this Act , may provide for the exemption from taxes , charges or other levies ." (Emphasis supplied.) Crown Agents and its Foreign personnel shall be exempt from the payment of income tax from the income they have derived, are deriving and will still be deriving from the said Philippine Tax Computerization Project of the BIR, the said income payments having been exempted from taxes, duties, levies and other impositions imposed under applicable law (i.e., the Tax Code, as amended.). Furthermore, Sec. 103(q) of the Tax Code, as amended, provides that "transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws . . ." the gross receipts from the sale of services rendered by the Crown Agents and its Foreign Personnel for handling the 5-year Tax Computerization Program of the Bureau is exempt from VAT by virtue of R.A. No. 4860, a special law, in relation to the aforequoted provision of the Tax Code, as amended. Accordingly, Crown Agents and its Foreign Personnel are not required to register as taxpayers (whether as income or VAT taxpayers) for the services they render under the Philippine Tax Computerization Project because they are exempt from all taxes, charges, levies and other impositions imposed under the Tax Code, as amended, pursuant to Sec. 4-A of R.A. 4860, as amended by P.D. No. 150, otherwise known as the "Foreign Borrowing Act" and Sec. 103(q) of the Tax Code, as amended, in relation to Secs. 44(a)(2)(b)(v), 45(a) and 107, all of the same Code and paragraph 1.9 of the Consultancy Contract between DOF and the Crown Agents. (3) Whether Crown Agents can be allowed to remit its tax payments under a special-check-payment arrangement . Regarding your request that you be allowed to pay your tax payments i.e., your withholding taxes on the income payments you make to your Filipino consultants through a special-check-payment arrangement considering that your Project Director is not authorized to open another bank account nor is he allowed to perform any bank transaction except with the CA-authorized bank, that is, the Standard Chartered Bank in Makati, such arrangement is entirely acceptable and is hereby approved. Thus, your request from Revenue Region No. 7 for waiver regarding the new tax payment scheme requiring that tax payments should be in cash or thru a direct-debit bank scheme is hereby granted. (4) Whether Crown Agents ' Filipino consultants are subject to VAT . Filipino consultants sub-contracted by the Crown Agents to render services for them under the Philippine Tax Computerization Project are subject to the schedular individual income tax prescribed under Sec. 21(f) of the Tax Code, as amended, upon their taxable income received during each taxable year from all sources, whether from sources within or without the Philippines, considering that they are allegedly independent self-employed professionals. Said income payments are subject to the 10% creditable withholding tax under Sec. 1(a) of Revenue Regulations No. 6-85, as amended, otherwise known as the "Revised and Consolidated Expanded Withholding Tax Regulations", which you have been correctly withholding since 1992. They are therefore required to file their quarterly income tax returns and pay their quarterly income tax on taxable income received from such self-employment pursuant to Sec. 67 of the Tax Code, as amended, as implemented by Revenue Regulations No. 7-93 dated January 4, 1993. Let it not be construed, however, that the professional services rendered by these Filipino consultants under this Philippine Tax Computerization Project fall within the purview of the services rendered by professionals which are subject to VAT starting January 1, 1998, because Sec. 102(b)(3) of the Tax Code provides that "services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate." Thus, the sale of services by the subject Filipino consultants may effectively be zero-rated provided that they are VAT-registered taxpayers and that they have applied and secured prior approval for effective zero-rating on their sale of services to Crown Agents whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent rate. In other words, although the said sale of services is a taxable transaction for VAT purposes, the same shall not result in any output tax on the part of the Filipino consultants, and ultimately, the same shall not be shifted or passed on to the BIR which is the direct beneficiary of this Tax Computerization Project, and the input tax related to such effectively zero-rated sales of services shall be available as tax credit or refund. It is, however, understood that these Filipino consultants have already applied for effective zero-rating with the Revenue District Office (RDO) having jurisdiction with their respective principal place of business in accordance with Sec. 4.107-1(d) of Rev. Regs. No. 7-95, as amended by Rev. Regs. No. 6-97 because without an approved application for effective zero-rating, the transaction otherwise entitled to zero-rating shall be considered exempt. We trust that the above information has provided you adequate responses to your clarificatory questions. llcd Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue