BIR Ruling No. 240-11

July 22, 2011 BIR RULING NO. 240-11 RR 17-05 Radial Arch Construction, Inc. No. 3-J Abad Santos St., Phase 5, Pacita Complex I, San Pablo, Laguna Attention: Mr. Juanito M. Agujo, Jr. President/General Manager Gentlemen : This refers to your letter dated May 5, 2010 requesting the possible refund or conversion of its unutilized Tax Subsidy Availment Certificate (TSAC). ICDSca Documents submitted disclose that Radial Arch Construction, Inc. is a sub-contractor of the Hazama Corporation, a domestic corporation holding office at Bldg. 11 B&C, Berthaphil Business Park, Jose Abad Santos Ave., CSEZ Clarkfield, Pampanga; that Hazama Corporation is in joint venture with Taisei and Nippon Steel (JV HTN) in connection with the Subic Clark Tarlac Expressway Project (SCTEX); that there was no provision in the initial contract as to how payment shall be done for the 12% Value Added Tax (VAT); that VAT Subsidy Checks were issued to Radial Arch Construction, Inc. to be drawn against the TSAC issued by the BIR in favour of BCDA FAO Hazama-Taisei-Nippon Steel Joint Venture; that Radial Arch Construction, Inc. had accumulated unused VAT Subsidy Checks amounting to Two Million Two Hundred Thousand Ninety Three Eight Hundred Eighty Five & 18/100 (P2,293,885); * that because of the uncollected amount, Radial Arch Construction, Inc. still has Accounts Payable to Suppliers and Labor Sub-Contractors; that the company is thinking about its unused VAT Subsidy Checks which it plans to have it refunded or converted to a Tax Credit Certificate (TCC). In reply, please be informed that Revenue Regulations (RR) No. 17-05 or "Regulations Providing for the Policies, Guidelines and Procedures in the Implementation of the Tax Subsidy Granted by the Fiscal Incentives Review Board (FIRB) to the Bases Conversion and Development Authority (BCDA) for the Subic-Clark-Tarlac Expressway Project" was issued to implement the provisions in the Exchange of Notes between the Republic of the Philippines and the Government of Japan which states that no part of the loan proceeds from the Japan Bank for International Cooperation for the construction of the SCTEP shall be used to pay for Philippine taxes, that the Government of the Republic of the Philippines shall assume the Philippine taxes on Japanese firms or nationals operating as contractors, consultants or suppliers in the Project, and that the Philippine executing agencies shall not withhold any part of fiscal levies and taxes including VAT when making payments for their purchases of products and/or services to the Japanese companies operating as suppliers, contractors and/or consultants. (Sec. 1 [2], RR 17-05) Hence, a tax subsidy was granted by the Fiscal Incentives Review Board (FIRB) to the BCDA for such Philippine taxes, including but not limited to, Value-Added Tax (VAT), income tax and excise tax with respect to its procurement/acquisition of goods and services from Japanese primary contractors and consultant in connection with the construction of the SCTEP. (Sec. 1 [3], RR 17-05) Because of the input-output system of our VAT law, the VAT mechanism provided for in these regulations also extends to the subsidy for the VAT on the procurement/acquisition of goods and services by the primary contractors and consultant from their Japanese and Filipino subcontractors and suppliers, as well as by the Japanese and Filipino subcontractors and suppliers from their Japanese and Filipino sub-subcontractors and sub-suppliers, exclusively in connection with the SCTEP. (Sec. 1 [3], RR 17-05) As to how the VAT subsidy issued to BCDA will affect its contractors and consultants, Section 4 of RR 17-05 provides that: "SECTION 4. VAT. The tax subsidy to be granted by the FIRB to BCDA for VAT represents the output VAT liability of the primary contractors and consultant that the primary contractors and consultant can pass-on to BCDA. Since the existing VAT system works on the input-output system, the primary contractors and consultant can deduct from their output VAT liability the input VAT passed-on to them by their subcontractors and suppliers for the Project. The subcontractors and suppliers, in turn, can deduct from their output VAT liability the input VAT passed-on to them by their sub-subcontractors and sub-suppliers . Payments by BCDA to the primary contractors and consultant are exempt from the withholding VAT prescribed under Section 114(C) of the National Internal Revenue Code as implemented by Revenue Memorandum Circular No. 42-99. Such exemption from withholding of VAT is also recorded in the Exchange of Notes between the Government of the Republic of the Philippines and the Government of Japan. Accordingly, BCDA shall not withhold any VAT from its payments to the primary contractors and consultant. The subcontractors, suppliers, sub-subcontractors and sub-suppliers have the right and option to use the VSCs and SVSCs as payment for their VAT liabilities under the Project and other projects, as well as for payment of their other internal revenue tax liabilities. The VSCs and SVSCs issued under these regulations shall be valid for a period of five (5) years reckoned from the date of issuance of the VSCs by the primary contractors and consultant and thereafter shall be revalidated for another five (5) years. Because of the input-output system of the VAT, the VAT mechanism for this Project as described in these Regulations shall apply to transactions of all entities up to the fourth level only." The same Regulations defined the documents involved in the availment of the subsidy for VAT as follows: "(g) "Tax Subsidy Availment Certificate" or "TSAC" shall mean the instrument issued by the Bureau of Internal Revenue (BIR) to the BCDA, upon proper application by the BCDA, showing the amount of tax assumed by the BCDA for each of the primary contractors and consultant in connection with the SCTEP, which includes, but is not limited to, the subsidy on income tax and VAT. DACcIH (h) "VAT Subsidy Checks" or "VSCs" shall mean the pre-numbered instruments released by the BIR to BCDA for issuance to each of the primary contractors and consultant, drawn against the VAT TSAC of each of the primary contractors and consultant. The primary contractors and consultant may use the VSCs received from the BCDA to pay the input VAT passed-on to them by their subcontractors and suppliers. (i) "Sub-VAT Subsidy Checks" or "SVSCs" shall mean the instruments issued by the BIR to the subcontractors and suppliers upon presentation by the subcontractors and suppliers of their VSCs to the BIR for appropriate annotation of the requested amount of SVSCs to be issued in favor of the sub-subcontractors and sub-suppliers, in accordance with Section 6(A)(4) hereof. The subcontractors and suppliers may use the SVSCs to pay the input VAT passed-on to them by their sub-subcontractors and sub-suppliers. The sub-subcontractors and sub-suppliers may use the SVSCs to pay their net VAT payable/liability under the Project or other projects, or their other internal revenue taxes." Hence, the primary contractors and consultant of BCDA may use the VSCs as payment of their net VAT payable/liability, if any, to the BIR on the SCTEP, or as payment for the input VAT passed-on to them by their subcontractors and suppliers on the Project. (Section 6 [A] [4], RR 17-05) Likewise, the subcontractors and suppliers may use the VSCs as payment of their net VAT payable/liability to the BIR on the SCTEP, or as payment for the input VAT passed-on to them by their sub-subcontractors and sub-suppliers on the Project. In the latter case, the subcontractors and suppliers shall present the VSCs, together with the invoice billings of their sub-subcontractors and sub-suppliers, to the RDO having jurisdiction over BCDA's principal office for the issuance and release of SVSCs which the subcontractors and suppliers can then issue to their sub-subcontractors and sub-suppliers as payment for the input VAT passed-on to them by the sub-subcontractors and sub-suppliers. In this case, the RDO shall annotate the amount of issued SVSCs on the VSC presented by the subcontractors and suppliers. (Section 6 [A] [5], RR 17-05) Thus, the present request for possible conversion or assignment of the VAT Subsidy Checks held by Radial Arch Construction, Inc. cannot be granted for lack of legal basis. The Regulation only provides for the application and utilization of the TSACs, VSCs and SVSCs and does not provide for their conversion to cash, refund or assignment. It cannot be presumed that what is not prohibited by the Regulations, such as the conversion or assignment of TSACs, is allowed. This runs counter to the plain, unequivocal language of the law, a rule of statutory construction. It has been established that if a statute is clear, plain and free from ambiguity, it must be given its literal meaning and applied without attempted interpretation. (Espiritu v. Cipriano, 55 SCRA 533 [1974]) To depart from the meaning expressed by the words of the statute is to alter the statute and legislate, not to interpret. (Taada v. Yulo, 61 Phil. 515 [1935]) A statute which is plain, clear and free from doubt is not subject to construction; there is no need for interpretation, only application. (Cebu Portland Cement Co. v. Municipality of Naga, 24 SCRA 708, 712 [1968]) Radial Arch Construction, Inc. may utilize the VSCs issued to it as payment of its net VAT payable/liability to the BIR on the SCTEP, or as payment for the input VAT passed-on to them by their sub-subcontractors and sub-suppliers on the Project. In the latter case, the subcontractors and suppliers shall present the VSCs, together with the invoice billings of their sub-subcontractors and sub-suppliers, to the RDO having jurisdiction over BCDA's principal office for the issuance and release of SVSCs which the subcontractors and suppliers can then issue to their sub-subcontractors and sub-suppliers as payment for the input VAT passed-on to them by the sub-subcontractors and sub-suppliers. In this case, the RDO shall annotate the amount of issued SVSCs on the VSC presented by the subcontractors and suppliers. If Radial Arch Construction, Inc. does not need the VSCs to pay for the input VAT passed-on to it by its sub-subcontractors and sub-suppliers ( e.g. , where they paid the passed-on VAT in cash), they can utilize the VSCs for the payment of their net VAT payable/liability from other projects or of their other internal revenue tax liabilities. It is understood that the VSCs shall be valid for a period of five (5) years reckoned from the date of issuance of the VSCs by the primary contractors and consultant and thereafter shall be revalidated for another five (5) years. IN VIEW OF THE FOREGOING, this Office is of the opinion and hereby holds that TSACs, VSCs and SVSCs issued pursuant to RR 17-05 cannot be converted to cash or assigned. These instruments should be strictly utilized only as specified in the Revenue Regulations. DHCcST Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue