VAT Ruling No. 001-93

January 4, 1993 VAT RULING NO. 001-93 Section 102 (a) (2) 097-90-001-93 Hitachi, Ltd. 6 Kanda Surugadal 4 Chome Chiyoda-Ku, Tokyo, Japan Attention: Mr . K . Tanaka Deputy General Manager Accounting Control Department Gentlemen : This refers to your letter dated November 27, 1992, in effect, requesting a clarification of your VAT liability as a foreign corporation who will undertake a portion of the Japanese-funded projects involving the National Corporation's Malaya Gas Turbine and Sucat 1 & 4 Rehabilitation Projects. cdll It appears that National Power Corporation (NPC) obtained a loan from Japan Export and Import Bank to finance the Malaya Gas Turbine/Sucat 1 & 4 Rehabilitation projects subject to the condition that the projects will be undertaken by Japanese firms; that NPC contracted Marubeni Corporation of Japan to undertake the construction of the projects and the latter, in turn, contracted you to undertake a portion of the construction project; that with respect to your part of the project, you have further contracted, through your branch office in Manila, various local contractors to undertake the actual construction works under your direct technical supervision; that these contractors will be paid for in foreign currency directly remitted by you in Japan to the Philippines through the banking system in accordance with Central Bank rules and regulations. In reply, please be informed that under Section 102(a) (2) of the Tax Code, reading "SEC. 102. Value-added tax on sale of services . (a) Rate and base of tax. ". . . Provided, That the following services performed in the Philippines by VAT-registered persons shall be subject to 0%: xxx xxx xxx "(2) Services other that those mentioned in the preceding sub-paragraph, the consideration for which is paid for in acceptable foreign currency which is remitted inwardly to the Philippines and accounted for in accordance with the rules and regulations of the Central Bank of the Philippines." sale of services to a foreign principal which is paid for in foreign currency and remitted inwardly in accordance with Central Bank rules and regulations is zero-rated. In the instant case, although the funding for the project is obtained by loan from Japan, since the loan is subject to the condition that the project will be undertaken by Japanese firms, the main project contractors are necessarily Japanese. In relation to the local sub-contractors who undertake the actual construction work, you are not only a main contractor, but the foreign principal whom the local sub-contractors are directly obligated to undertake specific performance. Accordingly, since your payment to the local sub-contractors are in foreign currency and that you will have inwardly remitted the same in accordance with Central Bank rules and regulations, the conclusion is justified that such transaction is zero-rated pursuant to the aforecited provision of the tax code. (VAT Ruling No. 017-92). With respect to the supervisory/technical services rendered by your Japanese consultants/technicians, it is our opinion that income payments to such persons are exempt from VAT in accordance with BIR Ruling Nos. 251-88 and 337-88 and VAT Ruling No. 097-90 in relation to Section 8(b) of R.A. 6395, the pertinent portion of which states; "The loans, credits and indebtedness contracted under this subsection and the payment of the principal, interest and other charges thereon, as well as the importation of machinery, equipment, materials, supplies and services, by the Corporation, paid from the proceeds of any loan, credit or indebtedness, incurred under this Act, shall also be exempt from all direct and indirect taxes, fees, imposts, other charges and restrictions, including import restrictions previously and presently imposed, and to be imposed by the Republic of the Philippines, or any of its agencies and political subdivisions ." aisadc Very truly yours, EUFRACIO D. SANTOS Deputy Commissioner Officer-in-Charge