VAT Ruling No. 003-05

March 8, 2005 VAT RULING NO. 003-05 Sec. 114 (c), RMC Nos. 32-99, 42-99; VAT Ruling Nos. 106-99, 080-001, 023-99; BIR Ruling No. 002-97 Office of the Secretary Department of Public Works and Highways Manila Attention: Ms. Leonora J. Cuenca OIC Director, CFMS Gentlemen : This refers to your letter dated August 8, 2003 inviting attention to VAT Ruling Nos. 24-2002, 091-02, BIR Ruling No. 023-99, in relation to Rulings No. DA-176-2003 issued to Italian-Thai Development Public Co., Ltd on June 3, 2003 and DA 202-2003 dated June 30, 2003 issued to Hanjin Heavy Industries Construction Co., Ltd., respectively. Specifically, you asked whether or not the afore-cited BIR and/or VAT Review Committee rulings would likewise apply as follows: 1. For Japanese contractors/nationals, no VAT and withholding tax deductions from contractor's billings; 2. For non-Japanese contractors, 8.5% VAT and 2% withholding tax are deducted from the GOP portions of contractor's billings. With respect to VAT, please be informed that under Sec. 114 of the Tax Code of 1997, there shall be a withholding tax of 8.5% to be imposed on payments to government public works contractors. However, as held in numerous rulings involving JBIC-funded public works projects, this Office has consistently held, pursuant to the Exchange of Notes between the governments of Japan and the Philippines (considered to be an international agreement), that, ". . . as amplified under Revenue Memorandum Circular (RMC) No. 42-99 dated June 2, 1999, OVERSEAS ECONOMIC COOPERATION FUND or OECF (now JAPAN BANK FOR INTERNATIONAL COOPERATION or JBIC) Funded Projects are covered by the standard clauses of the Exchange of Notes between the Japanese Government and the Republic of the Philippines which read as follows: " The Government of the Republic of the Philippines will exempt the Fund from all fiscal levies or taxes imposed in the Republic of the Philippines on and/or in connection with the Project Loan, the Engineering Service Package Loan and the Commodity Loan as well as interest accruing therefrom. " The Government of the Republic of the Philippines will, itself or through its executing agencies or instrumentalities, assume all fiscal levies or taxes imposed in the Republic of the Philippines on Japanese firms and nationals operating as suppliers, contractors or consultants on and/or in connection with any income that may accrue from the supply of products and/or services to be provided under the Project Loan. " RMC No. 42-99 established that under the first clause cited above, it is the intention of the two governments not to use the proceeds of the loan in the payment of all fiscal levies or taxes imposed by the Philippines. In view thereof, this Office held that the executing government agencies should not impose the 8.5% VAT withholding prescribed under Section 114(C) of the Tax Code of 1997 for government public works contractors undertaking JBIC Funded Projects, irrespective of the nationality of the contractor (VAT Ruling Nos. 080-2001, 106-99). Otherwise, the covenant not to subject the funded amount to taxes, which is the clear intent of both the Philippine and the Japanese Governments under the Exchange of Notes, might be violated. It shall be understood that the exemption does not cover the remaining balance of the supplemental works to be paid from LRTA's corporate funds. Further, it should be clarified that notwithstanding the non-imposition of the advance VAT withholding, both Japanese and Filipino or non-Japanese contractors engaged in JBIC-funded projects remain subject to the normal 10% VAT by way of output tax. . . " Accordingly, payments by the DPWH, or any implementing government agency for that matter, to the contractor, whether a Japanese national or otherwise, of a public works/infrastructure project funded by the Japan Bank for International Cooperation (JBIC), formerly Overseas Economic Cooperation Fund (OECF), is exempt from the 8.5% VAT withholding. It shall be understood, however, that the exemption does not cover the remaining balance of the works to be paid from the implementing agency's own funds. With respect to ADB-funded projects, this Office, invoking BIR Ruling No. 023-99, opined under BIR Ruling No. DA-202-2003 in this wise "Article 56(1) of the ADB Charter provides that the Bank, its assets, property, income and its operations and transactions, shall be exempt from all taxation and from all customs duties. Thus, the Bank shall also be exempt from any obligation for the payment, withholding or collection of any tax or duty. Since ADB is an international organization, its funds are similar to those of an OECF Fund which under the Exchange of Notes shall not be used to pay for the tax. In BIR VAT Ruling No. 23-99 dated February 25, 1999, this Office ruled that ADB is covered by the exemption provision of Section 135(c) of the Tax Code of 1997 which states that petroleum products sold to entities which are by law exempt from direct and indirect taxes are exempt from excise tax. Thus, it is entitled to a refund of specific taxes in cases where its purchases of petroleum products, beginning January 1, 1999, are made inclusive of taxes. . . Accordingly, the computation referred to in number (1) above should likewise be made applicable to Hanjin's output VAT liability attributable to its ADB and JEXIM funded projects, . . . " Thus, such being the case, it is clear that payments to contractors of public works projects funded by the ADB shall, likewise, be exempt from the 8.5% VAT withholding. On the 2% expanded withholding tax (EWT), the rule is that public works contractors are subject thereto except when the contractor is a Japanese national (RMC No. 32-99) or it is a joint venture (BIR Ruling No. 002-97), regardless of the nationality of the parties to the said joint venture. However, the co-venturers shall be liable to pay the regular corporate income tax on their respective shares in the income of the joint venture. cHCaIE Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group