Bureau of Local Government Finance Opinion

August 3, 2015 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mr. Yoshikazu Oshikawa Project Manager TOYO Construction Co.,Ltd. 4th Floor, Princess Building 104 Esteban Street, Legaspi Village Makati City Sir : This refers to your letter dated June 19, 2015 requesting confirmation regarding exemption from local business taxes (LBT) of Contractor like TOYO Construction Co.,Ltd.,a Japanese contractor, in the implementation of the local government units (LGUs) assumption of all fiscal levies and taxes on Japanese (ODA) grant-aid project. TAacHE In connection of the above request, the following facts are presented: 1. The Government of Japan gave a general grant-aid assistance to the Government of the Republic of the Philippines for the implementation of the Project for Enhancement of Coastal Communications Systems (Package-I).The Project entails procurement and installation of Inmarsat Communication System, and procurement and installation of Vessel Traffic Management System (VTMS) including construction of VTMS Control Center and Rader Station with tower at Mactan (Cebu) Channel. The Project sites are located at Cebu City, Talisay City and Lapu-Lapu City, and the equipment mounted on vessels operated by the Philippine Coast Guard. 2. The Japan International Cooperation Agency (JICA) will finance the Project through a Grant Agreement with the Government of the Republic of the Philippines (GRP),without obligation of repayment. However, as a counterpart cost, the Government of the Republic of the Philippines will shoulder (among others) the counterpart personnel, MOEE derived as a result of the grant-aid project, import taxes and duties of equipment, VAT payment, transport cost of equipment from unloading port to the project site and ROW/land acquisition. 3. In accordance with the Exchange of Notes dated March 25, 2014 between the Ambassador of Japan and the Secretary of the Department of Foreign Affairs, the Government of the Republic of the Philippines will (by itself or through its executing agencies) (a) assume all fiscal levies and taxes imposed in the Philippines on Japanese nationals on payment for the income accruing from the supply of the products and/or services under the contract ,and (b) assume all duties and related fiscal charges imposed in the Philippines on Japanese nationals on import of products and/or services supplied under the contract . (Underscoring for emphasis) HDICSa 4. On January 22, 2015, the Philippine Coast Guard (the implementing Agency of the Government of the Republic of the Philippines for the Project) awarded the contract for the Project of the Contractor (both members of the consortium are Japanese nationals). 5. The contract was signed by both parties on January 23, 2015 in Japan, stipulating on Article 9.3 that the Client (the Government of the Republic of the Philippines or other authorized person) shall be bear custom duties, internal taxes and other fiscal levies which may be imposed with respect to the supply of products, services and equipment necessary for the Work of the Project. For the project implementation, the Contractor will set up its site offices in Cebu City, Talisay City and/or Lapu-Lapu City. It is claimed that based on Section 2 (1) and (4) of Executive Order No. 292 or the Administrative Code of 1987,quoted hereunder, it is understood that the term "Government of the Republic of the Philippines" refers also to local government units (LGUs): "Sec. 2. General Terms Defined. Unless the specific words of the text, or the context as a whole, or a particular statute, shall require a different meaning: "(1) Government of the Republic of the Philippines refers to the corporate governmental entity through which the functions of government are exercised throughout the Philippines, including, save as the contrary appears from the context, the various arms through which political authority is made effective in the Philippines, whether pertaining to the autonomous regions, the provincial, city, municipal or barangay subdivisions or other forms of local government .( Emphasis ours ) "(4) Agency of the Government refers to any of the various units of the Government, including a department, bureau, office, instrumentality, or government-owned or controlled corporation, or a local government or a distinct unit therein. ( Emphasis ours ) IDaEHC "xxx xxx xxx." In view of the above quoted provisions of E.O. No. 292 and considering that there lies no distinction between national and local government, it is your belief that the tax assumption of the Government of the Republic of the Philippines for local business tax should likewise be honored by cities, municipalities and the like. This assumption is also stated in the Exchange of Notes between the Government of Japan and the Government of the Republic of the Philippines dated March 25, 2014 which states as follows: "The Government of the Republic of the Philippines will, by itself or through its executing agencies, assume all duties and related fiscal charges which may be imposed in the Republic of the Philippines on Japanese nationals with respect to the import of the products and/or services supplies under the contracts referred to in paragraph 4." "The Government of the Republic of the Philippines will, by itself or through its executing agencies, assume all fiscal levies and taxes imposed the Republic of the Philippines on Japanese nationals with respect to the payment carried out for and the income accruing from the supply of the products and/or services under the contracts referred to in paragraph 4." Moreover, the Department of Justice (DOJ) clarified that local business taxes imposed by cities and municipalities are likewise embraced in the definition of taxes to be assumed by the Government of the Republic of the Philippines, the pertinent portion of which is reads as follows: "Nonetheless, it is noted that the clauses quoted above used the words 'levies' and 'taxes' without any distinction. Unless the contrary appears in the Exchange of Notes or related agreements, no distinction can be made as the kinds of levies/taxes that the Government of the Republic of the Philippines itself or through its executing agencies or instrumentalities will assume under the said agreement." DTCSHA In view of the foregoing, this Bureau, consistent with its previous stand on the same issue, maintains the view that LGUs concerned cannot impose a Contractor's Tax on Japanese companies operating as contractors, in relation to the implementation of the aforequoted Project, as in the herein case of Toyo Construction Co.,Ltd. It bears emphasis, however, that said company shall be liable to pay the Mayor's permit and other regulatory fees or charges that the LGUs concerned may have imposed under their duly enacted tax ordinances, the assumption by the National Government of the tax liability being applicable to local taxes only. We hope that this will help clarify matters. Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director