ITAD Ruling No. 095-03

July 16, 2003 ITAD RULING NO. 095-03 Sections 105, 108, & 114 Tax Code of 1997 Revenue Regulations No. 8-99 Revenue Regulations No. 7-95 VAT Ruling Nos. 038-90, 016-98, 066-99 BIR Ruling No. ITAD 21-03 Pacific Rim Innovation & Management Exponents, Incorporated 502, Manila Luxury Condominium Pearl Drive, Ortigas Center Pasig City Attention: Ms. Elvira C. Ablaza President & CEO Gentlemen : This refers to your request for a ruling dated October 21, 2002 regarding your tax liability for the consulting services you have rendered in connection with the Fisheries Resource Management Project (FRMP) of the Department of Agriculture (DA) and the Bureau of Fisheries and Aquatic Resource (BFAR), as financially assisted by Asian Development Bank (ADB) and Japan Bank for International Cooperation (JBIC). It is represented that Pacific Rim Innovation Management Exponents, Inc. (PRIMEX) has entered into two (2) separate contracts for consulting services with DA and BFAR for the implementation of the latter's foreign assisted project, the FRMP, (1) as Project Management Consultant under the ADB loan and (2) as Philippine Associate of Overseas Agro-Fisheries Consultants, Ltd. of Japan under the JBIC loan; that the FRMP is financially assisted by JBIC and ADB by virtue of the separate loan agreements contracted with the Government of the Philippines; that payments for the subject consulting services are directly paid to PRIMEX by JBIC and ADB, as shown in the remittance slips of payment; that both contracts have no specific provisions for tax payments by PRIMEX but that it was made clear during the financial negotiations between PRIMEX and DA/BFAR that the contract ceilings stipulated in the contracts are net of tax although such stipulation was not reflected in the Minutes of Contract Negotiations; and that it was indicated in the remittance slips of ADB and JBIC that the payments are net of tax. It is now your contention that PRIMEX is not liable for the payment of the 10% value-added tax on the services it rendered as consultant to the FRMP of DA and BFAR. EcICDT In reply, please be informed that Section 105 of the Tax Code of 1997, provides: "Section 105. Persons Liable . Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716. . . ." Based on the above-quoted provision, any person who sells, barters, exchanges, leases goods or properties, renders services in the course of trade or business shall be subject to the value-added tax imposed in Sections 106 to 108 of the Tax Code of 1997. The provision also states that being an indirect tax, the value-added tax may be shifted or passed on to the service buyer by imbedding the VAT component in the quoted contract price, else it shall be expressly stated to be net of tax. Accordingly, PRIMEX, being engaged in consultancy services, is subject to, and is liable for the payment of the 10 per cent value-added tax. However, PRIMEX has the option to shift or pass on to its buyers the amount of VAT. If the buyers/customers are VAT-exempt persons, such passed-on VAT shall not be considered as tax but part of the acquisition cost of the goods purchased or services rendered. ( VAT Ruling No. 016-98 dated May 22, 1998 ) Accordingly, the exemption status of the buyers/customers, other than those for whom the sales of goods or services are authorized to be zero-rated, cannot be invoked to avoid the payment of the VAT on the billing for the services rendered to them. ( VAT Ruling No. 038-90 ) Under Revenue Regulations No. 8-99, VAT-registered establishments can no longer indicate VAT as a separate item in the official receipt. The enactment of Republic Act No. 7716, otherwise known as the Expanded Value-Added Tax Law, effectively revoked the option of VAT-registered taxpayers to treat VAT as a separate item in the receipt when it mandated that the VAT should be determined by multiplying the total amount indicated in the invoice by one-eleventh (1/11). This provision is now codified in Section 106(D)(1) and Section 108(C) of the Tax Code of 1997 (then Sections 100(d)(1)and 102(c), NIRC, as implemented by Revenue Regulations No. 7-95). The said rule is not without any underlying reason. It is precisely appended into law to address the concern of the consuming public that business establishments may be able to obscure the fact that the VAT is already included in their cost such that if the VAT is allowed to be indicated as a separate item in the invoice, they may be able to charge additional billings in the guise of VAT, hence unduly profiting thereon. On the part of tax administration, what is required to be removed is the false notion, and convenient excuse, that VAT is the reason for any price increase. Thus, what has been put into place is the credit invoice type method of recognizing input VAT. Simply put, all one has to do to determine the amount of his input VAT is to look into the gross amount indicated in his receipt and divide it by 1/11. ( VAT Ruling No. 066-99, July 14, 1999 ) Upon perusal of the Contracts For Consulting Services, as well as the Minutes of Contract Negotiations of PRIMEX with DA and BFAR, nothing in the documents would show any stipulation that the quoted contract price is net of tax. Such being the case, the law presumes that the contract price as quoted in the consultancy contracts between DA/BFAR and PRIMEX is inclusive of VAT. To claim otherwise would violate the "parol evidence rule" which states that, "When the terms of an agreement have been reduced to writing, it is to be considered as containing all such terms, and, therefore, there can be, as between the parties and heir successors in interest, no evidence of the terms of the agreement other than the contents of the writing." ( Rule 130, Sec. 7 of the Rules of Court of the Philippines ) EHaASD If ever, should the subject contracts do not reflect the true intentions of the parties as it is herein claimed, then the solution would be a reformation of, or an amendment to, the said contracts pursuant to Article 1359 of the New Civil Code of the Philippines. However, the concurrence letters issued by ADB and JBIC to the elect that the contract amounts approved by both banks were net of tax would not, by that fact alone, support your claim that the service fees payable under the contract should likewise be net of tax. It simply means that no part of the loaned amount shall be used for the payment of tax. In this light, we wish to emphasize that the tax being imposed under Section 105 in relation to Section 108 of the Tax Code of 1997 is not on the fund granted by ADB and JBIC but on the service fees received by PRIMEX in consideration of the services it rendered to the FRMP of DA and BFAR. ( BIR Ruling No. ITAD 21-03 dated January 30, 2003 ) As regards your claim that it is the duty of DA and BFAR to have withheld and remitted the VAT, please be informed that under Section 114 (c) of the Tax Code of 1997, "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 from sellers and services rendered by contractors which are subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold the value-added tax due . . . ." In other words, it is necessary that payments are supposed to be made directly by the Government or any of its political subdivisions, instrumentalities or agencies to contractors so that the former could deduct and withhold the value-added tax liability of the seller or contractor. In this case, however, ADB and JBIC directly paid the service fees to PRIMEX. Thus, DA and BFAR could have not even momentarily exercised control over the money for the payment of the services rendered, much less, deduct and withhold the value-added tax liability of PRIMEX in compliance with Section 114(c) of the Tax Code of 1997. In sum, this Office is of the opinion and so holds that PRIMEX is liable to pay 10% value-added tax based on the contract price of the subject consulting services in connection with the FRMP of DA and BFAR. Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service