Recoupment Portion of Gross Accomplishments No Longer Subj. to 6% Withholding VAT

October 25, 1993 BIR RULING NO. 422-93 RECOUPMENT PORTION OF GROSS ACCOMPLISHMENTS NO LONGER SUBJ. TO 6% WITHHOLDING VAT 102 000-00 422-93 Sycip, Gorres, Velayo & Co. 6760 Ayala Avenue, Makati Metro Manila Attention: Atty . F . G . Tagao Tax Division This refers to your letter dated August 20, 1993 stating that Kawasaki Steel Corporation (KSC) is the contractor of the Philippine Ports Authority (PPA) with respect to the South Harbor Rehabilitation Project; that under the contract between KSC and PPA, PPA is obliged to pay certain amounts representing the contract price to KSC; that in accordance with the terms of the contract, PPA made advance payments on the contract price to KSC as follows: Amount Date of Payment Peso Portion P24,116,474.34 January 14, 1992 Dollar Portion 36,174,711.53 March 4, 1992 that KSC duly reported the above payments in its VAT returns for the quarters ending February 1992 and May 1992, respectively, and paid the corresponding 10% VAT on the said amounts; that the reporting of the advance payments as part of the gross receipts at the time of payment for VAT purposes is in accordance with Section 102(a) of the Tax Code; that pursuant to the contract, KSC bills PPA periodically in amounts denominated as "Gross Accomplishment" against which the advance payments (denominated as "recoupment"), retention money (denominated as "retention") and the 1% expanded withholding are deducted. To illustrate, if KSC bills PPA P2,200,000 the amount net of "recoupment" and "retention" will be P1,540,000 computed as follows: Gross Accomplishment (contract price inclusive of VAT) P2,200,000.00 Less: Recoupment (20% of advance Payments) 440,000.00 Amount Net of Recoupment 1,760,000.00 Less: Retention (10% of Gross Accomplishment) 220,000.00 Amount net of recoupment and retention P1,540,000.00 ========== and that PPA believes that it should withhold the 6% VAT based on Gross Accomplishment without deducting the recoupment and retention portion. In connection therewith, you now request confirmation of your opinion that the recoupment portion of the Gross Accomplishment is no longer subject to the 6% VAT; and that the retention portion is subject to VAT upon its actual receipt which is upon completion of the project. In reply thereto, please be informed that the gross receipts derived by any person engaged in the sale of services shall be subject to a value-added tax equivalent to 10%. Moreover, "Gross Receipts" means the total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged for materials supplied with the services and deposits or advance payments actually or constructively received during the taxable quarter for the service performed or to be performed for another person, excluding value-added tax (Sec. 102, Tax Code, as amended). Such being the case, the recoupment portion of the gross accomplishment which represents the advance payments received by KSC from PPA, is no longer subject to the 6% withholding value-added tax pursuant to Republic Act No. 7649 considering that KSC had already paid the 10% VAT thereon at the time of receipt of the advance payment. Moreover, since the actual cash receipts of KSC on each installment payment is net of the 10% retention which will be paid by PPA to KSC upon the completion of the project, the same is not subject to the 6% withholding value-added tax considering that receivable is not included in the term "gross receipts" (VAT Ruling No. 118-92 dated December 21, 1992). cdtech LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue