Nishizawa Limited

August 4, 2021 ITAD BIR RULING NO. 040-21 Sections 113 (B) (4) and 236 (I) National Internal Revenue Code of 1997 Nishizawa Limited 1 2-5, Nihonbashi Kodenmacho, Chuo-Ku Tokyo, Japan Attention: ________________ Site Manager Gentlemen : This refers to your letter dated November 6, 2019 in relation to the following queries: 1. Can Nishizawa Limited (Nishizawa) pay 12% value-added tax (VAT) with One-Time Taxpayer Identification Number (TIN) directly from Japan to local manufacturers and transportation companies? The paid amount of 12% VAT will be reimbursed later to Nishizawa by the National Electrification Administration (NEA). 2. Can Nishizawa pay 12% VAT through its branch office with a new TIN? Its branch office will be established in two to three months, and the paid VAT will be reimbursed by NEA to Nishizawa through the branch office. 3. Can the branch office receive reimbursement of the total amount of VAT paid? 4. How can Nishizawa obtain legal regulation that it is mandatory for it to establish a branch office in Philippines in order to receive reimbursement? As a background, Nishizawa was engaged by NEA, a government-owned and controlled corporation (GOCC) that is responsible for the country's rural electrification program in partnership with electric cooperatives, as a contractor for a 771 million project funded by the Overseas Economic Cooperation Fund (OECF),now Japan Bank for International Cooperation (JBIC).The project aims to improve the equipment for power distribution in the Bangsamoro area in the Philippines. Nishizawa expressed its willingness to temporarily shoulder and pay the 12% output VAT charged by local manufacturers and transportation companies to the project, and to establish a branch office in Philippines with the understanding that such office is mandatory under Philippine laws and regulations. Nishizawa hopes that with the establishment of the branch office, it will be easier for it to seek reimbursement from NEA. DACcIH In reply, please be guided as follows: Nishizawa can pay the 12% VAT to local supplier of goods and services using a One-Time TIN Section 236 (I) of the Tax Code states that only one Taxpayer Identification Number (TIN) shall be assigned to a taxpayer and securing more than one TIN is punishable under Section 275 of the Tax Code. On November 13, 2018, Nishizawa registered with Revenue District Office No. 39 of the Bureau of Internal Revenue (BIR) as a nonresident foreign corporation and was issued TIN 000-000-000-000. The same TIN shall, therefore, be used by Nishizawa when dealing with government agencies and instrumentalities, including GOCCs, like NEA in this case, and private supplier of goods and services. Whether the TIN issued to Nishizawa is a one-time TIN or was made pursuant to Section 1 of Executive Order No. 98, series of 1999, is immaterial for the purpose of paying VAT directly from Japan to supplier of goods and services needed to implement the project. The more relevant pieces of information to be established here are the identification of the purchaser and the purpose for which the goods and services were procured. It cannot be denied that the purchases were made by Nishizawa for the purpose of implementing the project. To substantiate that the purchases of goods and services for the project were really made by Nishizawa, the presentation of VAT invoice/official receipts is indispensable. It is not, however, required that TIN of Nishizawa be reflected in the sales invoice or official receipts issued by its local supplier of goods and/or services since the former is not a VAT-registered taxpayer. Under Section 113 (B) (4) of the Tax Code, only when the purchaser of goods and services is a VAT-registered person and the amount of purchase is P1,000 or more that the VAT invoice/official receipt must contain the name, business style, if any, address and TIN of the purchaser, thus: SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons . xxx xxx xxx (B) Information Contained in the VAT Invoice or VAT Official Receipt . The following information shall be indicated in the VAT invoice or VAT official receipt: xxx xxx xxx (4) In the case of sales in the amount of One thousand pesos (P1,000) or more where the sale or transfer is made to a VAT-registered person, the name, business style, if any, address and Taxpayer Identification Number (TIN) of the purchaser, customer or client. (Emphasis supplied) Nishizawa is a nonresident foreign corporation and is not a VAT-registered taxpayer. Thus, its TIN need not be reflected or indicated in the invoices or receipts. NEA should, however, exercise caution and prudence in granting VAT reimbursements so as to ensure that only the VAT component of goods and services necessary for the implementation of the project is reimbursed. The branch can pay the VAT to the supplier of goods and services, and thereafter seek reimbursement from NEA In the case of Marubeni Corporation (formerly Marubeni-Iida, Co., Ltd.) vs. Commissioner of Internal Revenue and Court of Tax Appeals , 1 the Court held that the general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation. HSCATc Therefore, if Nishizawa conducts its business through its branch office in the Philippines, the branch becomes the taxpayer. All its transactions, be it sales or purchases, must be under its name and TIN and not of the head office. The branch can now directly pay the VAT on purchases of goods and services related to the project and can seek VAT reimbursements after substantiating the said purchases. Again, the best proof to be presented when seeking reimbursement is the sales invoice or official receipt issued by a VAT-registered supplier. If the branch is a VAT-registered taxpayer, the items specified in Section 113 (B) (4) of the Tax Code are now required to be reflected in the invoice/official receipt issued by a VAT-registered seller. If, on the other hand, the transaction was made independently of the branch and the latter was only made as an intermediary or a channel for the VAT reimbursements, the taxpayer would still be the foreign corporation. Consequently, the TIN of the branch cannot be used to substantiate its transactions. The head office may, however, authorize the branch to receive the such reimbursements from NEA. The establishment of a branch office in Philippines is not a prerequisite for VAT reimbursement The BIR assumes that Nishizawa's VAT reimbursement in this case proceeds from the Exchange of Notes for projects funded by the OECF (now JBIC),which usually requires 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. 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. 2 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. The inconsistencies in the implementation and interpretation of the tax assumption provision under the Exchange of Notes prompted the issuance of Revenue Memorandum Circular 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 BIR set the rules that must govern OECF-funded projects, thus: IDTSEH 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." Based on 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. In other words, the Japanese companies can bill, and seek reimbursement of the 12% VAT paid in connection with the OECF-funded project from the executing government agency. The Japanese companies are, however, required to file the prescribed VAT returns on gross receipts derived from the OECF-funded projects, claim their input taxes from their purchases of goods, properties and services from their suppliers or subcontractors and pay the output tax or VAT thereon, after offsetting the creditable or allowable input taxes. In this case, Nishizawa can obtain reimbursement from NEA of the 12% VAT paid on its purchase of goods and services for the project even without a branch being established for the said purpose. When the Philippine Government agreed to assume the taxes of all fiscal levies and taxes related to the project under the Exchange of Notes, it did so without a condition that the Japanese company shall establish a branch office in the Philippines. It must be emphasized that the tax assumption under the Exchange of Notes is a form of concession given to Japanese suppliers, contractors, or consultants in consideration of the OECF Loan, the proceeds of which were used for the implementation of the project. 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. G.R. No. 76573, September 14, 1989. 2. Abaya v. Ebdane ,544 Phil. 645 (2007).