Sumitomo Mitsui Construction Co., Ltd.

March 4, 2021 ITAD BIR RULING NO. 004-21 Section 7, Exchange of Notes between the Philippine Government and the Japanese Government dated November 19, 2015; Revenue Memorandum Circular No. 8-2017 Sumitomo Mitsui Construction Co., Ltd. Manila Office 6th Floor, Peninsula Court Building 8735 Paseo de Roxas corner Makati Avenue 1226 Makati City Attention: Mr. Hitoshi Yamaji Authorized Representative Gentlemen : This refers to your letter dated March 6, 2020 requesting our comments on the tax obligations of Sumitomo Mitsui Construction Co., Ltd. ("Sumitomo") (formerly Sumitomo Construction Co., Ltd.), a contractor for a project funded by the Japan International Cooperation Agency ("JICA") through the Japan Bank for International Cooperation (JBIC), formerly known as the Overseas Economic Cooperation Fund (OECF). HTcADC The facts are as follows: Sumitomo is a foreign corporation organized and existing under the laws of Japan. It was granted a license by the Securities and Exchange Commission on January 21, 1997 to establish a branch office in the Philippines for the purpose of undertaking the construction of the Second Mandaue-Mactan Bridge Project Contract Package 1 as part of the Kajima-Sumitomo Joint Venture, and of other government projects funded by the OECF (now JBIC). The Sumitomo Branch is located in Makati City, Philippines. It registered with the Bureau of Internal Revenue on June 3, 1997. On November 19, 2015, the governments of the Philippines and Japan executed an Exchange of Notes, whereby the former was granted a loan amounting to JPY_______________ for the implementation of the North-South Commuter Railway (Malolos-Tutuban) Package 2 Project (the "Project"). The loan bears an interest rate of 0.10% per annum payable within thirty (30) years after a grace period of ten (10) years. On January 23, 2019, the Department of Transportation ("DOTr") and Sumitomo entered into a Contract Agreement for the implementation of the civil works for the Project. In consideration, DOTr will pay Sumitomo the contract price of JPY_______________. In reply, please be informed that under Section 7 of the Exchange of Notes, the Philippine Government shall, by itself or through its executing agency, assume: a) all duties and related fiscal charges imposed in the Philippines on the Japanese companies operating as suppliers, contractors or consultants with respect to the import and re-export of their own materials and equipment needed for the implementation of the Project; b) all fiscal levies and taxes imposed in the Philippines on the Japanese companies operating as suppliers, contractors or consultants with respect to the payment carried out for and the income accruing from the supply of products or services required for the implementation of the Project; and c) all fiscal levies and taxes imposed in the Philippines on the Japanese employees engaged in the implementation of the Project with respect to their personal income derived from Japanese companies operating as suppliers, contractors or consultants for the implementation of the Project. Relative thereto, the Philippine Government or its executing agency shall be responsible for the liquidation or settlement of such fiscal levies, duties, taxes and other similar charges. The Exchange of Notes provides only a tax assumption mechanism, i.e. , the obligation or liability to pay tax remains but the same is merely passed on to a different person. Consequently, income tax shall still be imposed on the income of these Japanese companies operating as suppliers, contractors or consultants for the implementation of the Project; value-added tax on every sale of goods and services related to the Project as well as the importation of their own materials and equipment needed for the Project; and income tax on the personal income of Japanese employees working on the Project. These taxpayers shall not however, by the express terms of the Exchange of Notes, assume the payment of these taxes. Liability for Income Taxes The applicable income taxes in this case includes corporate income tax (CIT) of Sumitomo, personal income tax (PIT) of Japanese employees engaged in the implementation of the Project, fringe benefits tax (FBT) of qualified Japanese employees other than rank and file, and branch profit remittance tax (BPRT), among others. Under normal circumstances, CIT and BPRT are direct liabilities of Sumitomo, while the FBT and PIT are direct liabilities of the income recipients themselves but are required to be withheld at source by Sumitomo. On the contrary, these income taxes are the liabilities of the DOTr under the Exchange of Notes. While the payment of these taxes is assumed by the Philippine government or DOTr pursuant to the Exchange of Notes, the computation thereof, the filing of return and remittance to the BIR shall still be the duty of Sumitomo. It must be emphasized that the amount of these taxes could be determined only by Sumitomo after taking into account the gross income derived from the Project and allowable deductions (ordinary and necessary expenses paid or incurred during the taxable year which are directly attributable to the implementation of the Project) when ascertaining the liability for corporate income tax; the net taxable compensation for PIT; the total profits applied or earmarked by the branch for remittance to the head office in case of BPRT; and the grossed-up monetary value of the fringe benefit for FBT. These amounts are supported by sufficient evidence, such as official receipts, invoices or other adequate records, which are under the possession and custody of Sumitomo. Hence, only Sumitomo could accurately determine the amount of taxes to be shouldered by the Philippine government or its implementing agency and could supply the information needed for the preparation of returns. Moreover, only the assumption of taxes was passed on to the DOTr under the Exchange of Notes and not the reporting obligations of Sumitomo with the BIR. Liability for VAT Concerning the twelve percent (12%) VAT included in the price of goods and services procured by Sumitomo for the Project, Revenue Memorandum Circular No. 8-2017 1 provides that it shall include in its billing and pass on the 12% VAT to the DOT, to wit: CAIHTE "1. The VAT-registered suppliers and sub-contractors of the Japanese companies shall bill and pass on the twelve percent (12%) VAT to the Japanese companies/contractors. In turn, the Japanese contractors shall include in their billing and pass on the 12% VAT to the concerned executing agencies of the Republic of the Philippines. Since under the Exchange of Notes, the OECF Fund shall not be used to pay for the tax, then the VAT is for the account of the Philippine government. 2. The Japanese contractors shall file the prescribed VAT returns on gross receipts derived from OECF-funded projects, claim their input taxes from their purchases of goods, properties and services from their suppliers or subcontractors and shall pay the output tax or VAT thereon, after offsetting the creditable or allowable input taxes, considering that the amount intended for payment of the VAT has already been collected and received by the Japanese contractors or nationals from the executing government agencies as part of the total billing/invoice price. 3. In no case shall input taxes arising from transactions attributable to activities unrelated to the OECF-funded project be allowed or be credited against the output tax on gross receipts from the project." From the foregoing provision, the VAT-registered suppliers and subcontractors of Japanese companies involved in OECF-funded projects shall bill and pass on the 12% VAT to these Japanese companies, which in turn, shall include in their billing and pass on the 12% VAT to the concerned executing agencies of the Republic of the Philippines. Therefore, Sumitomo is allowed to bill and seek the payment of the 12% VAT paid in connection with the Project from DOTr. The DOTr shall not, however, withhold a final VAT of 5% before making payments to Sumitomo since it is obligated under the Exchange of Notes to assume the payment of the 12% VAT. VAT on importations of Sumitomo's own materials and equipment needed for the implementation of the Project shall likewise be assumed by the DOTr. Implementation of the tax assumption scheme After the determination of the amount of income taxes, Sumitomo shall immediately prepare the tax returns and necessary documents, particularly the official receipts and/or invoices, other relevant accounting records, and proceed to the DOTr to secure the payment of these taxes. The implementing agency, on the other hand, shall immediately evaluate the documents submitted and prepare whatever document is necessary for the release of funds allocated for the payment of these taxes. Penalties for late filing shall likewise be assumed by the implementing agency since liability thereto attaches to the person directly liable for the payment of taxes. Therefore, to avoid penalties, the implementing agency shall observe the deadline for the payment of taxes and Sumitomo shall give the former sufficient time to evaluate the documents and returns submitted to it. The following returns shall be prepared and filed by Sumitomo, whenever necessary, on or before the date prescribed by law or existing issuances, depending on whether Sumitomo is required to file its returns manually or through the Electronic Filing and Payment System (EFPS): BIR Forms Filing Date Type of Income Income Tax Returns and Remittance Forms Manual EFPS Corporate income tax BIR Form No. 1702-RT (Annual Income Tax Return for Corporation, Partnership and Other Non-Individual Taxpayer Subject Only to Regular Income Tax Rate) On or before the 15th day of the 4th month following close of the taxpayer's taxable year BIR Form No. 1702Q (Quarterly Income Tax Return for Corporations, Partnerships and Other Non-Individual Taxpayers) Within sixty (60) days following the close of each of the first three (3) quarters of the taxable year whether calendar or fiscal year Income payments subjected to creditable withholding tax BIR Form No. 0619-E [Monthly Remittance Form for Creditable Income Taxes Withheld (Expanded)] On or before the 10th day following the month in which withholding was made Fifteen (15) days following the month in which withholding was made BIR Form No. 1601-EQ [Quarterly Remittance Return of Creditable Income Taxes Withheld (Expanded)] Not later than the last day of the month following the close of the quarter during which withholding was made BIR Form No. 1604-E [Annual Information Return of Creditable Income Taxes Withheld (Expanded)/Income Payments Exempt from Withholding Tax] On or before March 1 of the year following the calendar year in which the income payments subject to expanded withholding taxes or exempt from withholding tax were paid or accrued Income payments subjected to final withholding tax, including branch profit remittances BIR Form No. 0619-F (Monthly Remittance Form for Final Income Taxes Withheld) On or before the 10th day following the month in which withholding was made Fifteen (15) days following the month in which withholding was made BIR Form No. 1601-FQ (Quarterly Remittance Return of Final Income Taxes Withheld) Not later than the last day of the month following the close of the quarter during which withholding was made BIR Form No. 1604-F (Annual Information Return of Income Payments Subjected to Final Withholding Taxes) On or before January 31 of the year following the calendar year in which the income payments subject to final withholding taxes were paid or accrued. Withholding tax on compensation of Japanese employees BIR Form No. 1601-C (Monthly Remittance Return of Income Taxes Withheld on Compensation) On or before the tenth (10th) day of the following month in which withholding was made Fifteen (15) days following end of the month BIR Form No. 1604-C (Annual Information Return of Income Taxes Withheld on Compensation) On or before January 31 of the year following the calendar year in which the compensation payment and other income payments were paid or accrued Fringe benefits given to Japanese employees other than rank and file BIR Form No. 1603Q (Quarterly Remittance Return of Final Income Taxes Withheld on Fringe Benefits Paid to Employees Other than Rank and File) Not later than the last day of the month following the close of the quarter during which withholding was made VAT Returns Manual EFPS BIR Form No. 2550M (Monthly Value-Added Tax Declaration) Not later than the 20th day following the close of the month Not later than the 25th day following the close of the month BIR Form No. 2550Q (Quarterly Value-Added Tax Return) Not later than the 25th day following the close of each taxable quarter Tax assumption does not extend to subcontractors The Exchange of Notes expressly mentioned Japanese companies operating as suppliers, contractors or consultants for the implementation of the Project only and nowhere is it stated that the tax assumption obligation of DOTr extends also to subcontractors' tax liabilities. Thus, the Japanese subcontractors of Sumitomo shall still comply with its reporting obligations with the BIR and pay its own tax liabilities. Liability for taxes other than national taxes As to the payment of local taxes, you may coordinate with the Local Government of Makati City since it has jurisdiction over the Philippine branch of Sumitomo. Other matters concerning the filing and payment of taxes should be addressed to BIR Revenue District Office No. 50-South Makati where Sumitomo is registered. This ruling is issued on the basis of the facts as represented. However, if it will be disclosed upon investigation that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. aScITE Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. Clarifying the Tax Treatment of Value-Added Tax on Government Money Payments for OECF Funded Projects under Exchange of Notes between Republic of the Philippines and the Government of Japan.