Grant Aid Projects

February 16, 2001 VAT RULING NO. 004-01 VAT Ruling 021-00 000-00 15 January 2001 Hon . Tsukasa Kawada Minister for Political and Economic Affairs EMBASSY OF JAPAN 2627 Roxas Blvd., Pasay City 1300 SUBJECT : Grant Aid Projects Dear Minister Kawada : This refers to your letter dated 11 January 2001 requesting for the immediate resolution of the problem being encountered in the implementation of the Exchange of Notes (E/N) concluded between the GOVERNMENT OF JAPAN (GOJ) and the REPUBLIC OF THE PHILIPPINES (RP) on 11 October 2000. It is represented that under the said E/N, the GOJ extended Grant Aid to the RP for the " Construction and Equipping of Davao Medical Center ; Rehabilitation of Flood Control Operation and Warning System ; Rehabilitation of Approach Radar Facility in the Ninoy Aquino International Airport ; and Establishment of the National Tuberculosis Reference Laboratory ." That, this Grant Aid is a donation from the GOJ , hence, not subject to repayment by the Government of the RP; That, however, it is a condition in the said E/N (1) that, the GOJ will deposit the fund in the name of the Government of the RP, with a Bank in Japan as may be designated by the Government of the RP or its designated authority; (2) that, the grant will be used by the Government of the RP properly and exclusively for the purchase of the products of Japan or the RP and the services of Japanese or Philippine nationals; (3) that, the Government of the RP shall "bear all the expenses other than those covered by the Grant;" (4) that the Government of the RP shall, " by itself or through its executing agencies, assume all fiscal levies and taxes imposed in the Republic of the Philippines on Japanese nationals with respect to the payment carried out for and the income accruing from the supply of the products and services under the Verified Contracts ;" (5) that, the Government of the RP or its executing agencies " will be responsible for the prompt liquidation or settlement of such fiscal levies, duties, taxes and other similar charges ." In VAT RULING No. 021-00 dated 09 June 2000, it has been held that the tax privileges granted under the GOJ-RP Exchange of Notes for Grant Aid Projects are similar in all respect with the tenor of the tax privileges granted under OECF-Funded Projects, hence, the procedures adopted under RMC No. 42-99 dated 02 June 1999 shall likewise apply to the said Grant Aid Projects. Thus, the input VAT passed on to the Japanese contractors, by domestic suppliers of goods and services, in the implementation of the said projects shall, in turn, be passed on to the RP executing agencies, as part of the invoice billings. Hence, under this procedure, the VAT is truly assumed by the Government of the Republic of the Philippines, consistent with its covenant under the said GOJ-RP Exchange of Notes. That, however, in some Grant Aid Projects, the RP implementing agencies, due to lack of funds or other financial predicaments, are more often than not, delayed in paying their obligations. In your aforesaid letter, you requested that the aforementioned input VAT be refunded by the BIR However, after your said letter, upon representations before the VAT Review Committee by Mr. Shuntaro Kawahara of the Japanese Embassy, he requested that the VAT refund issue be resolved later on and that the Japanese contractors be simply allowed an extension within which to file their VAT returns until such time that the RP Executing Agency is able to pay the Japanese contractor's invoice billing, without imposition of any penalty for late payment of the tax. In reply, please be informed that the said Exchange of Notes is an Executive Agreement between the Republic of the Philippines and the Government of Japan, hence, forms part of the law of the Philippines. (see the Supreme Court decision in the case of COMMISSIONER OF INTERNAL REVENUE VS. JOHN GOTAMCO & SONS, INC., G.R. No. 31092, February 27, 1987). The covenant of the Republic of the Philippines to assume payment of the tax and other fiscal levies arising from the said Grant Aid Projects is binding and must necessarily be complied with. Since payment of the VAT is the responsibility of the Executing Agency of the Republic of the Philippines, and the delay in the payment thereof is attributable to the said Agency, please be informed that this Office finds the aforesaid request meritorious. Hence, the aforesaid Japanese contractors are hereby allowed to file their said VAT returns within the time as prescribed by law provided, however, that payment of the VAT due thereunder is hereby extended, without imposition of penalty for late payment provided, further, that the said contractor shall remit the VAT within ten (10) days following the date in which the amount intended for payment of the VAT is actually received by the Japanese contractor, from RP Executing Agency. ITCcAD Please be guided accordingly. Very truly yours, (SGD.) RENE G. BAEZ Commissioner of Internal Revenue