Shimizu-Ulticon-Takenaka Joint Venture

June 7, 2021 ITAD BIR RULING NO. 023-21 Sections 7 (1) (c) and 8, Exchange of Notes between the Philippine Government and the Japanese Government dated August 25, 2015 Section 114 (C), National Internal Revenue Code of 1997, as amended; Revenue Memorandum Circular No. 8-2017; Revenue Memorandum Circular No. 45-2015 Shimizu-Ulticon-Takenaka Joint Venture 5th Floor, King's Court Building 2129 Chino Roces Avenue 1200 Makati City Attention: AAA Shimizu Corporation Gentlemen : This refers to your letter dated July 30, 2020 requesting this Bureau to issue a ruling on the amount of value-added tax (" VAT ") that the Department of Public Works and Highways ("DPWH") should allocate on the contract price of a project funded by the Japan International Cooperation Agency ("JICA") through the Japan Bank for International Cooperation (formerly Overseas Economic Cooperation Fund (OECF). HTcADC The relevant facts are as follows: On August 25, 2015, the governments of the Philippines and Japan executed an Exchange of Notes, whereby the former was granted a loan amounting to ___________________ by the former for the implementation of the Bypass Construction Project in Davao City, Davao Del Sur ("the Davao Project") and another 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. Meanwhile, the Davao Project has a contract price of ________________ and the implementation of the civil works therefor was awarded by the DPWH to Shimizu-Ulticon-Takenaka Joint Venture ("Joint Venture") on March 10, 2020. Sections 7 (1) (c) and 8 of the Exchange of Notes state that the Philippine Government shall, by itself or through its executing agency assume 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 the supply of products or services required for the implementation of the Davao Project, and shall be responsible for the liquidation or settlement of such fiscal levies, duties, taxes and other similar charges. However, instead of assuming the twelve percent (12%) VAT, the DPWH proposed a change in the Detailed Unit Price Analysis Form of the project via Supplemental Bulletin No. 12, calling for a reduction in the VAT component of the project from 12% to five percent (5%) following its prevailing Department Order (DO) No. 197 dated October 7, 2016. Thus, in the Notice of Award of the project, only 5% of its contract price is allocated as VAT component, which is below the 12% output VAT normally incorporated in the price of goods and services under Sections 106 (A) and 108 (A) of the National Internal Revenue Code of 1997 ("Tax Code") ,as amended, and passed-on by VAT-registered suppliers to its customers. In reply, please be informed as follows: The 5% VAT component under DO No. 197 was actually based on this Bureau's earlier issuance, Revenue Memorandum Circular (RMC) No. 45-2015 1 dated August 24, 2015. Under this circular, the Philippine Government, itself or through its executing agencies or instrumentalities, shall assume only the 5% final withholding VAT of projects funded under the Japanese Overseas Economic Cooperation Fund ("OECF") ,and therefore, the Japanese contractors for these projects cannot include in their billing the whole 12% VAT that will be assumed by the Philippine Government or its executing agencies or instrumentalities. The foregoing provisions were, in turn, based on Section 114 (C) of the Tax Code as amended by Republic Act. No. 9337, 2 which then mandated the government or any of its political subdivisions, instrumentalities or agencies, including government-owned or -controlled corporations (GOCCs) to withhold a final withholding VAT of 5% before making payments to VAT-registered supplier of goods and services, to wit: " SEC. 114. Return and Payment of Value-Added Tax. xxx xxx xxx (C) Withholding of Creditable Value-Added Tax. The Government or any of its political subdivisions, instrumentalities or agencies, including government-owned or -controlled corporations (GOCCs) shall , before making payment on account of each purchase of goods and services which are subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold a final value-added tax at the rate of five percent (5%) of the gross payment thereof :Provided, That the payment for lease or use of properties or property rights to nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For purposes of this Section, the payor or person in control of the payment shall be considered as the withholding agent." (Emphasis ours) The old provision of Section 114 (C) of the Tax Code applies to government money payments in general, except those covered by special rules such as those governed by an Exchange of Notes. In Abaya v. Ebdane , 3 the Court held, among others, that 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. Considering that the Philippines agreed to be bound by the provisions of the Exchange of Notes and expressly assumed all taxes due from the Japanese companies operating as suppliers, contractors or consultants in relation to the OECF-funded project, it cannot, without lawful justification, renege on its commitment and pass the payment of taxes to the latter as if the same were imposed under ordinary circumstances. CAIHTE Moreover, the inconsistencies in the implementation and interpretation of the tax assumption provision under the Exchange of Notes prompted the issuance of RMC No. 8-2017 on January 11, 2017. Acknowledging the obligation of the Philippine government to assume the payment of VAT under the Exchange of Notes, the Bureau set the rules that must govern OECF-funded projects, thus: 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." Contrary to the provision of RMC No. 45-2015, this new issuance now states that 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, DPWH in this case. In other words, the Japanese companies are allowed to bill, and seek reimbursement from, the executing government agency for the 12% VAT paid in connection with the OECF-funded project and not only the 5% VAT. Since the payment by the DPWH is not subject to 5% final withholding VAT, the Joint Venture 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. Finally, it bears stressing that Section 114 (C) of the Tax Code quoted above has already been amended by Republic Act (RA) No. 10963, otherwise known as the Tax Reform for Acceleration and Inclusion Act (the TRAIN Law) effective January 1, 2018, and now reads: " SEC. 114. Return and Payment of Value-Added Tax. xxx xxx xxx (C) Withholding of Value-Added Tax. The Government or any of its political subdivisions, instrumentalities or agencies, including government-owned or -controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and services which are subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold a final value-added tax at the rate of five percent (5%) of the gross payment thereof: Provided, That beginning January 1, 2021, the VAT withholding system under this Subsection shall shift from final to a creditable system: Provided, further, That the payment for lease or use of properties or property rights to nonresident owners shall be subject to twelve percent (12%) withholding tax at the time of payment. Provided, finally, That payments for purchases of goods and services arising from projects funded by Official Development Assistance (ODA) as defined under Republic Act No. 8182, otherwise known as the Official Development Assistance Act of 1996, as amended, shall not be subject to the final withholding tax system as imposed in this Subsection. For purposes of this Section, the payor or person in control of the payment shall be considered as the withholding agent." (Emphasis ours) While the national government, or any of its political subdivisions, its instrumentalities and agencies, including government-owned or controlled corporations shall no longer impose the 5% final withholding VAT on payments for purchase of goods and services arising from OECF-funded projects, the fact remains that the government or its agencies shall assume the payment of VAT shouldered or paid by these Japanese companies operating as suppliers, contractors or consultants with respect to the payment carried out for the supply of products or services required for the implementation of the EOCF-funded projects, in keeping with the Philippine government's obligations under the Exchange of Notes and pursuant to RMC No. 8-2017. 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. Clarifying the Withholding of VAT on Government Money Payments for OECF Funded Projects under Exchange of Notes between the Republic of the Philippines and the Government of Japan. 2. An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 236, 237 and 288 of the National Internal Revenue Code of 1997, as Amended, and for Other Purposes. 3. 544 Phil. 645 (2007).