VAT Ruling No. 003-00

January 10, 2000 VAT RULING NO. 003-00 114 (C) 000-00 003-00 Heaven's Gate Construction and Equipment Rental 202 Banlat Road, Tandang Sora Quezon City Attention: Atty . Emiliano R . Nolasco Legal Officer Gentlemen : This refers to your letter dated November 20, 1999 requesting for a ruling as to the rate of creditable value-added tax (VAT) payment which the Department of Public Works and Highways (DPWH) will deduct from your progress billings, i.e., from 8.5% to 3.5% relative to the Lower Agusan Development Project (LADP) llcd Documents submitted disclosed that Heaven's Gate Construction and Equipment Rental had entered into a contract with the DPWH on December 4, 1997 for the construction of the Lower Agusan Development Project, Stage 1, Phase 1, Butuan City such as levee embankment, concrete floodwall including related structures, dredging and spoilbankyard treatment to generate resettlement area; that the aforestated project is principally funded by the Overseas Economic Cooperation Fund of Japan under the 14th Yen Loan Package; that the above said contract is derived from the original contract of G.G. Reyes Construction/Universal Dockyard Ltd./Home Construction/JPL Construction Joint Venture in the total amount of P445,852,180.88; that the above-mentioned Joint Venture contractors thru Amendment No. 4 of the original contract, have voluntarily offered to mutually terminate forty percent (40%) of their contract works, namely a section of the lower levee (excluding lighting, granular and boulder fill foundation treatment) and a section of the reinforced concrete floodwall in order that DPWH can hire new contractors to ensure the timely completion of the whole project; that DPWH accepted the compromise offer and directly negotiated with Heaven's Gate Construction and Equipment Rental for the prosecution of some portions of the work which the latter accepted at the same unit prices with previous contract in the total amount of P36.5 Million more or less; that it was understood that all provisions of the original contract of the joint venture shall apply to the new contracts involving the works mutually terminated; that the aforesaid agreement includes the payment of value-added tax (VAT) wherein the amount of P22,292,609.04 is provided therein and was carried forward with your contract as a whole; and that your firm would likewise be benefitted out of the VAT participation of the DPWH as provided for under the former consortium contract which states to wit: LibLex "Whereas, In addition to the said loan, the Employer (DPWH) shall provide the amount of Pesos Twenty-Two Million Two Hundred and Ninety-Two Thousand Six Hundred Nine and Centavos Four Only (P22,292,609.04) to defray the cost of Value-Added Tax (VAT), which is equivalent to five percent (5%) of the total contract price ." In reply thereto, please be informed as follows: Pursuant to Section 110 of the Tax Code of 1977, as amended by R.A. 7716, otherwise known as the Expanded Value-Added Tax Law, the government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled corporations (GOCC's), shall before making payment on account of its purchase of goods from sellers and services rendered by contractors which are subject to the value-added tax imposed in then Sections 100 and 102 of the Tax Code, deduct and withhold the value-added tax due at the rate of three percent (3%) of the gross payment for the purchase of goods and six percent (6%) on gross receipts for services rendered by contractors on every sale or installment payment which shall be creditable against the value-added tax liability of the seller or contractor. cdlex However, Section 100(c) of the Tax Code of 1977, as amended by R.A. 7716 was further amended by R.A. 8241, effective January 1, 1997 and which is now Section 114(C) of the Tax Code of 1997, added a provision that in the case of government public works contractors, the withholding tax rate shall be eight and one half percent (8.5%). Such being the case, this Office can only affirm that insofar as government public works contractors are concerned, the existing withholding tax regime is now 8.5% of the gross payment. With respect to the agreement of the parties as to the manner by which this tax is to be allocated or paid, this Office will interpose no objection for so long as the amount representing the VAT withholding of 8.5% is paid, no more, no less. Thus, if the DPWH agrees to the arrangement whereby it will shoulder payment of the 5% out of the 8.5% VAT which is supposed to be withheld from the gross billing of Heaven's Gate, then this Office will respect such an arrangement. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue