Sycip Gorres Velayo and Co.

November 16, 2018 ITAD BIR RULING NO. 115-18 Section 114 (C), National Internal Revenue Code of 1997, as amended; Revenue Memorandum Circular No. 8-2017 Sycip Gorres Velayo and Co. 6760 Ayala Avenue 1226 Makati City Attention: AAA _______________ Gentlemen : This refers to your letters dated August 31 and February 7, 2017 requesting confirmation that the Department of Public Works and Highways ("DPWH") will no longer withhold the 5% final withholding value-added tax ("VAT") on its payments to Shimizu Corporation Manila Branch ("Shimizu Manila Branch") in light of the issuance of Revenue Memorandum Circular No. 8-2017 1 ("RMC 8-2017") . HTcADC As a background, Shimizu Manila Branch is a Japanese contractor to the following projects of the DPWH which are funded under the Overseas Economic Cooperation Fund ("OECF") of Japan: 1. Civil Works for Arterial Road Bypass Project, Phase 2, Contract Package 3, Plaridel Bypass Road, located in the Province of Bulacan; and 2. Pasig-Marikina River Channel Improvement Project, Phase 3, Contract Package 1. In the discussion between DPWH and Shimizu Manila Branch , DPWH informed Shimizu Manila Branch that it will continue to withhold the 5% final VAT on its payments to Shimizu Manila Branch since it was not clear in RMC 8-2017 that government agencies implementing OECF-funded projects will no longer withhold the 5% VAT. DPWH cited an earlier circular, Revenue Memorandum Circular No. 45-2015 ("RMC 45-2015") , 2 which reads: "In view of the foregoing, this Office upholds the validity and application of RA No. 9 33 7 for government money payments under OECF Funded Projects pursuant to an Exchange of Notes between the Republic of the Philippines and the Government of Japan: 1. The Government of the Philippines, itself or through its executing agencies or instrumentalities, shall assume the final withholding VAT at the rate of five percent (5%) of the gross payment thereof under Section 114 (C) of the N IR C, as amended. This will be paid out from the fund of the Government of the Philippines, or of its respective government agencies or instrumentalities as a final settlement of the tax due on the income received by Japanese contractors; and 2. The Japanese contractors of OECF Funded Projects cannot include in its billing the whole twelve percent (12%) VAT that will be assumed by the Philippine Government or its instrumentalities or agencies in accordance with the Exchange of Notes." RMC 45-2015 clarifies that instead of 12%, government agencies making payments to Japanese contractors of OECF funded projects shall assume the final 5% VAT on the contract price of, or gross payments for, the project, and those contractors can no longer include in its billings to the government agencies the whole 12% output VAT. The 5% VAT is introduced under Republic Act No. 9337, 3 as an amendment to Section 114 (C) of the Tax Code of 1997, which reads: " 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) In reply, we quote below RMC 8-2017 for analysis: "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. aScITE 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 8-2017 amends RMC 44-2015 by requiring Japanese contractors of OECF-funded projects to no longer impute the 5% output VAT on the contract price or progress billings of these projects. Previously, under RMC 45-2015, government agencies implementing these projects assume the 5% final VAT on these projects. However, the assumed 5% VAT may not totally offset the input VAT borne by the Japanese contractors on goods, properties and services they purchased from VAT-registered suppliers and subcontractors. Under the new setup, government agencies will no longer withhold the 5% VAT , but simply reimburse the Japanese contractors of the 12% input VAT , effected thru the payment by government agencies of the Japanese contractors' total billing/invoice price, which the latter shouldered on their purchased goods, properties and services. This procedure is now incorporated in Section 114 (C) of the Tax Code, as a result of the effectivity of Republic Act No. 10963 , otherwise known as the TRAIN (Tax Reform for Acceleration and Inclusion) Law , on January 1, 2018, to wit: " 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) In view of the foregoing, this Office hereby rules that DPWH shall no longer withhold the 5% final VAT on its payments to Shimizu Manila Branch , but shall reimburse Shimizu Manila Branch of the 12% input VAT, effected thru the payment by DPWH of Shimizu Manila Branch 's total billing/invoice price, from its purchase of goods, properties and services from its suppliers and subcontractors, and which purchase is directly related to OECF-funded projects, pursuant to RMC 8-2017 and the TRAIN Law, which took effect on January 1, 2018. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed 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. Entitled 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 . 2. Entitled 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 . 3. Entitled 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 .