Japan Airport Consultants, Inc.

May 25, 2021 ITAD BIR RULING NO. 020-21 Section 7, Exchange of Notes between the Philippine Government and the Japanese Government dated March 25, 2013; Revenue Memorandum Circular No. 8-2017 Japan Airport Consultants, Inc. 14th Floor, Liberty Center H.V. dela Costa Street Salcedo Village 1227 Makati City Attention: AAA _______________ Gentlemen : This refers to your letter dated November 5, 2019 requesting this Bureau's assistance on the pending deficiency assessment for taxable year 2017 against Japan Airport Consultants, Inc. (JAC) , a contractor for a project funded by the Japanese Government, through the Japan International Cooperation Agency, pursuant to a valid Exchange of Notes. HTcADC In the said letter, you argued that the said deficiency assessment was not in accordance with the provisions of the Exchange of Notes which calls for the Philippine Government, by itself or through its executing agency, to be responsible for the liquidation or settlement of JAC's fiscal levies, duties, taxes and other similar charges. FACTS JAC is a foreign corporation organized and existing under the laws of Japan. It is established to provide solutions to complex social, economic, industrial and engineering issues in the multifaceted airline industry including airports. 1 On March 25, 2013, the Philippine Government, represented by the Secretary of Foreign Affairs, and the Japanese Government, represented by the Ambassador Extraordinary and Plenipotentiary to the Philippines, entered into an Exchange of Notes whereby the latter granted the former a loan amounting to JPY_____________ for the New Bohol Airport Construction and Sustainable Projection Project (Project), among others. The loan bears an interest rate of 0.20% per annum payable within thirty (30) years after a grace period of ten (10) years. To implement the Project, the Department of Transportation (DOTr) contracted JAC to provide technical services in the form of bidding assistance, construction management, maintenance operation, environmental and social considerations from May 2014 to December 2018. On February 28, 2019, this Bureau's Revenue District Office (RDO) No. 50-South Makati issued Letter of Authority No. LOA-050-2019-00000092 (eLA201600032739) to JAC to determine its internal revenue tax liabilities for taxable year 2017. RDO No. 50 assessed JAC for deficiency value-added tax (VAT) and expanded withholding tax amounting to Php_____________ and Php_____________, respectively. RULING In reply, please be informed that an exchange of notes is considered as an executive agreement, which is binding on the State even without Senate concurrence. In Abaya v. Ebdane [544 Phil. 645 (2007)] , the Court ruled in this wise: "An 'exchange of notes' is a record of a routine agreement that has many similarities with the private law contract. The agreement consists of the exchange of two documents, each of the parties being in the possession of the one signed by the representative of the other. Under the usual procedure, the accepting State repeats the text of the offering State to record its assent. The signatories of the letters may be government Ministers, diplomats or departmental heads. The technique of exchange of notes is frequently resorted to, either because of its speedy procedure, or, sometimes, to avoid the process of legislative approval. It is stated that 'treaties, agreements, conventions, charters, protocols, declarations, memoranda of understanding, modus vivendi and exchange of notes' all refer to 'international instruments binding at international law.' xxx xxx xxx Significantly, an exchange of notes is considered a form of an executive agreement, which becomes binding through executive action without the need of a vote by the Senate or Congress." Under Section 7 of the subject 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. CAIHTE Also, Section 6.3 (a) of the Special Conditions of the Contract for Consulting Services between DOTr and JAC provides as follows: "The Client warrants that the Consultant, Sub-Consultant and the Experts shall be exempt from any local taxes, duties, fees, levies and other impositions, imposed, under the applicable law in the Client's country, on the Consultant, Sub-consultants and the Experts in respect of: any payments whatsoever made to the Consultant, the Sub-consultants, and the Experts (other than nationals or permanent residents of the client's country), in connection with the carrying out of the services." As explicitly worded, the Exchange of Notes provides that the Philippine government, by itself or through its executing agency ( i.e. , DOTr in this case) shall assume all fiscal levies and taxes imposed in the Philippines on Japanese companies operating as suppliers, contractors or consultants to the Project including their employees involved in the Project. It bears stressing that this Bureau had already acknowledged, through its administrative issuances, the obligation of the Philippine Government under the Exchange of Notes, and that such Japanese companies are not liable for internal revenue taxes related to or accruing from projects funded by Overseas Economic Cooperation Fund (OECF). In Revenue Memorandum Circular (RMC) No. 8-2017, 2 the Commissioner of Internal Revenue interpreted the effect of the tax assumption clause in the Exchange of Notes on the Japanese companies' VAT liability, to wit: " Applied to Value-Added Tax (VAT), the 12% VAT under Section 106 and Section 108 of the Tax Code, as amended, imposed on all sales of goods and services, including sales of goods and services to the Government, shall be assumed by the Philippine Government or its executing agencies pursuant to the Exchange of Notes. In this context, and in order to effectively implement the Exchange of Notes, the following rules, for VAT purposes, shall govern: 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. xxx xxx xxx" It is clear from the aforequoted provision that the VAT liability related to the Project ultimately falls upon DOTr, the executing agency, and not upon JAC. However, before the latter could be made liable for the VAT on purchases of goods and services related to the Project, JAC should inform first DOTr that VAT was paid by it on such purchases. This can be done by including the VAT in its billings, and presenting proof of payment, to DOTr. Pursuant to RMC No. 8-2017, the following should have been done by JAC in order to seek reimbursement of any VAT paid on its purchases of goods and services related to the Project: 1. include the VAT component in its billings to DOTr; 2. collect payment of the VAT amount in full, i.e. , no final withholding VAT to be deducted; and 3. file the prescribed VAT return on gross receipts derived from the Project, net of input taxes, and pay the output tax, if any. In your letter, you mentioned: "Moreover, because of the non-inclusion of the twelve present (12%) VAT on JAC's billings, the DOTr did not perform its responsibility to liquidate or settle the fiscal levies and taxes on the Project. For this reason, JAC has nothing to file by way of VAT return since it did [ sic ] receive any payment of VAT from DOTr." Following the established procedures for cash disbursements, a government agency will not pay any amount not included in the billings. As a remedy, JAC is hereby advised to bill and collect from DOTr the VAT component of all purchases of goods and services related to the Project, and file the prescribed VAT return not later than the 20th day of the month following the receipt of DOTr's payment. aScITE This ruling is issued on the basis of the facts as represented. However, if it will be disclosed upon investigation that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. http://www.jacinc.jp/en/project/world_project1.html . 2. 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.