Department of Health

May 25, 2021 BIR ITAD BIR RULING NO. 022-21 Revenue Memorandum Circular No. 8-2017 Department of Health Building 2, San Lazaro Compound 1003 Sta. Cruz, Manila Attention: Racquel P. Alvendia Chief Accountant Accounting Division Gentlemen : This refers to your letter dated January 23, 2017 requesting this Bureau's opinion on the taxability of the Department of Health 's (DOH) transaction with Sumitomo Mitsui Corporation (Sumitomo) relative to the construction of a hospital (the Project) funded by the Japan International Cooperation Agency (JICA), now Overseas Economic Cooperation Fund (OECF). DETACa Particularly, you would like to be clarified on the value-added tax (VAT) payment under this undertaking pursuant to the Memorandum between the DOH and Sumitomo, which provides that the former shall provide a counterpart fund for the 12% VAT of the project cost which will be paid in cash to Sumitomo based on a payment schedule. In reply, please be informed as follows: DOH shall reimburse the 12% VAT in full With regard to your first issue, the DOH should not withhold tax on the counterpart fund payable to Sumitomo. Presumably, this corresponds to the 12% output VAT charged to Sumitomo by its VAT-registered suppliers and subcontractors on their deliveries to Sumitomo, which shall, in turn, be reimbursed by the DOH pursuant to paragraph 1 of Revenue Memorandum Circular (RMC) No. 8-2017, 1 to wit: "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. However, DOH should always ensure that the deliveries were directly connected with the Project, as required in paragraph 3 of RMC No. 8-2017, to wit: "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." RMC No. 8-2017 applies retroactively An RMC is a revenue issuance that clarifies pertinent and applicable portions, as well as amplifications, of laws, rules, regulations and precedents issued by the BIR and other agencies/offices. An RMC, unlike a Revenue Memorandum Order (RMO), does not have a prospective application since the former merely clarifies or amplifies pertinent provisions of existing laws, rules, regulations and precedents issued by the BIR and other government agencies and offices. As mentioned above, the DOH should not withhold tax on the counterpart fund payable to Sumitomo because this represents the output VAT charged by Sumitomo's suppliers and subcontractors. The provision of the 12% VAT by the DOH fulfills its obligations under the Memorandum DOH's reimbursement to Sumitomo of the 12% VAT billed and passed on to the latter by its supplier of goods and services required for the implementation of the Project fulfills its obligations to the Japanese Government under the Memorandum. The BIR assumes that the Memorandum has the standard provisions of an Exchange of Notes for OECF-funded projects, which require the Philippine Government, or its executing agency, to assume the following: 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. Applying the foregoing in this case, the DOH, being the executing agency, shall be responsible for the liquidation or settlement of all fiscal levies, duties, taxes and other similar charges imposed in the Philippines on the Japanese companies operating as suppliers, contractors or consultants with respect to the implementation of the Project. It must be emphasized that the Exchange of Notes only provides a tax assumption mechanism, i.e. , the obligation or liability to pay tax remains but the burden of paying the same is merely passed on to the DOH. Among the taxes to be assumed by the DOH in this case is the VAT on every sale of goods and services related to, as well as importation of materials and equipment needed for, the Project. 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. HEITAD 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.