BIR Ruling [UN-240-95]

June 30, 1995 BIR RULING [UN-240-95] Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . F . G . Tagao Gentlemen : This refers to your letters dated May 9 and June 8, 1995 stating that your client, John Holland Construction & Engineering Pty. Ltd. (JHCE), is the Philippine branch of an Australian company; that JHCE has signed a construction contract with the Philippine National Railways (PNR) involving the proposed project referred to as the "Main Line South Revitalization Project Stage II"; that the contract price for the proposed project will involve a foreign currency portion and a Philippine peso portion as follows: cdlex Peso Amount US$32,975,898 (P24.72 to US$1 P815,164,199 exchange rate at the time of bid submission) Peso Portion P275,396,109 Plus VAT 27,539,611 302,935,720 Total P1,118,099,919 =========== that the foreign funding for the project will be sourced from the Australian Agency for International Development (AAID) and from the Export Finance and Insurance Corporation (EFIC); that the foreign currency portion of the proposed project will be paid directly by inward remittance to JHCE from abroad; that the inward remittance shall be made through the banking system in accordance with the Bangko Sentral ng Pilipinas (BSP) rules and regulations and will be maintained in its foreign currency account in the Philippines; that the opening and maintenance of a foreign currency account by JHCE is in accordance with the liberalized foreign exchange regulations adopted by the government in accordance with Section 1 of Circular No. 1389; that for the proposed project, JHCE will secure the services of a resident corporation, John Holland Construction (Philippines), Inc. (JHCP), to act as its subcontractor; that the inward remittance shall be precipitated by JHCE's billing to PNR which in turn will instruct the foreign funding agencies (AAID and EFIC) to remit the US dollars payment directly to the account of JHCP; and that JHCP shall also be paid directly in foreign currency inwardly remitted from abroad. Based on the foregoing, you now request a confirmation of your following opinions: "1) The payment to JHCE of the foreign currency portion of the contract price on the proposed project which is directly inwardly remitted to it through its foreign currency account maintained in the Philippines is subject to 0% VAT; "2) As a zero-rated transaction, PNR should not withhold the 6% creditable VAT on its foreign currency payments to our client and the 6% creditable VAT should be withheld only on the peso portion; "3) Considering that the contract is inclusive of the VAT the basis for computing the 1% creditable expanded withholding tax insofar as the peso portion is concerned should be the gross payment net of the 10% VAT, and should withhold on this basis; "4) The payment to the sub-contractor, JHCP, in foreign currency inwardly remitted from abroad is subject to 0% VAT; and "5) Your above opinions will hold true whether under the present VAT law or under the expanded VAT law if implemented." In reply, please be informed that Section 102(a) of the Tax Code, as amended, provides in part as follows: ". . . Provided that the following services performed in the Philippines by VAT-registered persons shall be subject to 0%. (1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency, inwardly remitted to the Philippines and accounted for in accordance with the rules and regulations of the Central Bank of the Philippines. (2) Services other than those mentioned in the preceding sub-paragraph, the consideration for which is paid in acceptable foreign currency which is remitted inwardly to the Philippines and accounted for in accordance with the rules and regulations of the Central Bank of the Philippines . . ." In addition, under BSP Circular No. 1389 issued on April 13, 1993, pertinent portions of which are quoted hereunder as follows: "NON-TRADE FOREIGN EXCHANGE RECEIPTS AND DISBURSEMENTS, TRANSFERS OF LOCAL CURRENCIES AND GOLD TRANSACTIONS SEC. 1. Disposition of Foreign Exchange Receipts . Foreign exchange, acquisitions or earnings of resident from non-trade sources may at the option of said residents, be sold for pesos to Authorized Agent Banks (ABBs) or outside the banking system, retained, or deposited in foreign currency accounts, whether in the Philippines or abroad. All categories of banks except Offshore Banking Units (OBUs), duly licensed by the Central Bank shall be considered as ABBs. . ." In view of the foregoing, and considering that the foreign exchange funded portion of the project will be paid for in acceptable foreign currency, inwardly remitted to the Philippine foreign currency accounts (except Philippine OBU accounts) of JHCE and/or JHCP, your opinions that the payment to JHCE and to the sub-contractor, JHCP, is subject to 0% VAT is hereby confirmed, (BIR Rulings No. 176-94; VAT Ruling No. 039-93 dated October 7, 1993; and BIR Rulings No. 016-88 dated January 1, 1988). Consequently, your opinion that PNR should not withhold the 6% creditable VAT on its foreign currency payments to JHCE but the former should withhold the 6% creditable VAT on the peso portion of the project is also confirmed, since only the foreign currency portion of the project is zero-rated while peso portion of the project remains subject to the 10% VAT (Revenue Regulations No. 10-93). The same ruling applies if R.A. No. 7716 or the Expanded VAT law is implemented, since the pertinent VAT laws applicable under the circumstances remain unchanged. Finally, pursuant to VAT Ruling No. 070-90 gross income payment for purposes of the expanded withholding tax shall have the same scope as the gross receipts as defined in Section 102 of the Tax Code, as amended. Such being the case, your opinion that the basis for computing the 1% creditable expanded withholding tax insofar as the peso portion of the project is concerned should be the gross payment net of the 10% VAT, and PNR should withhold on this basis, is also confirmed since the contract price is inclusive of the VAT. (BIR Rulings No. 286-93 dated July 5, 1993; VAT ruling No. 078-92 dated June 17, 1992). This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, than this ruling shall be considered null and void. aisadc Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)