VAT Ruling No. 007-03

January 10, 2003 VAT RULING NO. 007-03 Sec. 108 VAT Ruling 004-01 Taisei Corporation Philippine Branch 23rd Floor, Equitable Bank Tower, Paseo de Roxas Salcedo Village, Makati City 1227 Metro Manila Attention: Tsutomu Yamazaki Adm. Manager Gentlemen : This refers to your letter, dated September 23, 2002, concerning your request for a confirmation of your opinion that, under the facts and the law obtaining, the 10% VAT in connection with your service contract with the Department of Agriculture (DA) shall be computed based on your gross receipts from the service component thereof and that you may be allowed to pay the same within ten (10) days after receipt of payment from the said Government Agency. ECcDAH It is represented that your Head Office, TAISEI CORPORATION-TOKYO, was awarded the construction of the project named "Establishment of Laboratory Facilities for Advanced Aquaculture Technologies" in Tigbuan, Iloilo City, with the Department of Agriculture (DA) as the Government Executing Agency; that, this project is financed by a grant ( i.e. , a donation) to the Republic of the Philippines, by the Government of Japan thru the Japan International Cooperative Agency (JICA); that, it is covered by the Exchange of Notes between the Republic of the Philippines, signed by the then Secretary of Foreign Affairs, Vice President Teofisto T. Guingona, Jr. and the Government of Japan, signed by Japanese Ambassador Yoshihisa Ara, in Manila last 13th of December 2001; that, under the Exchange of Notes , the Government of Japan (GOJ) and the Republic of the Philippines (RP) agreed on the following tax treatment to govern in the said grant-aid project: "The Government of the Republic of the Philippines or its designated authority will enter into contracts in Japanese yen with Japanese nationals for the products and services. . . "The Government of the Republic of the Philippines will exempt Japanese Nationals from all duties and related fiscal charges which may be imposed in the Republic of the Philippines with respect to the import of the products and services supplied under the Verified Contracts." That, the Record of Discussions of the said RP-GOJ Exchange of Notes , consistent with the provisions of Revenue Memorandum Circular No. 42-99, provides: "The Philippine executing agencies will be subject to the Value-Added Tax (hereinafter referred to as the VAT) imposed in the Republic of the Philippines on their purchases of products and services required for the implementation of the Project from the Japanese Nationals." That, the project was awarded and contracted with TAISEI CORPORATION, JAPAN; that, as the Philippine Branch of the said Corporation, you were instructed and assigned to directly handle the project; that, the construction of the project is to be executed by Taisei Corporation Philippine Branch by (a) importing materials and equipment from Japan; and (b) procuring materials and services in the Philippines; that, Taisei shall make progress billings (composed of cost of importation and value of local purchases for goods and services), coursed through the Department of Agriculture for confirmation; that, the Government of Japan through JICA shall then make payments of progress billings through a Japanese Yen Account directly to TAISEI CORPORATION, JAPAN; that, all Japanese Yen payments for the project do not include the VAT. But under current regulations, Taisei will be liable for 10% of the peso equivalent of the progress billings as output VAT payable to the Philippine government; that, under the Exchange of Notes and in the contract agreement, this tax is denominated as the VAT Portion which is to be shouldered and paid separately by the Department of Agriculture out of its own funds; that, because it is often the case that the Department of Agriculture has no ready and available funds of its own, it will be impossible for them to pay the VAT Portion at the same time that you collect the Yen account; that, an agreement was therefore reached with the DA so that said VAT payments shall be made by the DA via reimbursement method, copy of which has been submitted with your letter; that, consequently, you will have to incur all input taxes and the actual amount of input taxes incurred will then be reimbursed by the DA when funds become available to it; that, the VAT Portion is therefore not computed at 10% of the progress billing but as reimbursement of the input VAT actually paid to your local sub-contractors and suppliers; that, under this situation, you have no choice but to agree to this; that, another complication is that the VAT on the importation of materials and equipment for the project will be assumed by the DA directly through its automatic subsidy ; that, consequently, you will, therefore, have a situation where the cost of importation is part of your progress billing, supposedly subject to VAT, but no input tax on importation will be credited to you, hence, your request for specific ruling, as follows: "1. Does the VAT law allow the VAT Reimbursement method under which the DA will only pay us the actual input VAT incurred and not the 10% of the value of the gross receipts? "2. For purposes of the gross receipts subject to VAT on this project, the same shall be computed by deducting the amount pertaining to imported materials since the input VAT thereon has already been directly paid for and accounted by the DA through its tax subsidy. It is to be noted that the VAT is a passed-on tax. In this case, we have no occasion to pass on the VAT on importation because of the direct tax assumption by the DA. However, since we shall still pay for the cost of importation and include the same in our progress billing with DA and JICA, this portion should no longer form part of our gross receipts subject to VAT because we shall no longer be reimbursed for the corresponding input tax. "Thus, our VATable gross receipts shall be as per the following assumptions: Progress billing: P50M (Peso equivalent of Yen collection) Less: Cost of Importation per DA certification 20M (Input VAT directly paid by DA) Gross Receipts Subject to VAT P30M ==== "3. Pursuant to VAT Ruling No. 004-01 dated February 16, 2001, Taisei shall be allowed to file VAT returns for the project as follows: "(a) Declare Gross Receipts subject to VAT in the manner computed under item 2 above and file monthly/quarterly VAT returns; "(b) Payment of VAT Due (Output VAT Input VAT) is extended to within ten (10) days AFTER the actual receipt of payment of the VAT Portion from the DA." In reply, please be informed as follows: 1. The aforesaid Grant Aid, or donation, given by the Government of Japan to the Republic of the Philippines, through the Department of Agriculture as RP's Executing Agency, under the GOJ-RP Exchange of Notes, is an Executive Agreement of the Republic of the Philippines with the Government of Japan. Such Executive Agreement forms part of the law of the Philippines. The facts and the law obtaining in this case are similar to the case raised by the EMBASSY OF JAPAN for which VAT RULING No. 004-01, dated February 16, 2001, was issued by the Commissioner of Internal Revenue, as follows: ". . . 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. Accordingly, you shall pay the VAT due thereon within ten (10) days after receipt, from the Department of Agriculture, of the amount intended for its payment, pursuant to the provisions of the said GOJ-RP Exchange of Notes. 2. The facts obtaining in the case are also synonymous to the case of COMMISSIONER OF INTERNAL REVENUE VS. MARUBENI CORPORATION (G.R. NO. 137377, December 18, 2001). In this case, the construction project undertaken by MARUBENI was classified into OFFSHORE and ONSHORE portions. The Offshore portion consisted of materials and services undertaken in Japan and shipped to the Philippines, while the Onshore portion consisted of materials procured from and services undertaken by MARUBENI within the Philippines. The Supreme Court ruled that the said Offshore portion, having been undertaken outside the jurisdiction of the Philippines, is outside its taxing jurisdiction, hence, exempt from the old contractor's tax, as follows: "Clearly, the service of 'design and engineering, supply and delivery, construction, erection and installation, supervision, direction and control of testing and commissioning, coordination . . .' of the two projects involved two taxing jurisdictions. These acts occurred in two countries Japan and the Philippines. While the construction and installation work were completed within the Philippines, the evidence is clear that some pieces of equipment and supplies were completely designed and engineered in Japan. The two sets of ship unloader and loader, the boats and mobile equipment for the NDC project and the ammonia storage tanks and refrigeration units were made and completed in Japan. They were already finished products when shipped to the Philippines. The other construction supplies listed under the Offshore Portion such as the steel sheets, pipes and structures, electrical and instrumental apparatus, these were not finished products when shipped to the Philippines. They, however, were likewise fabricated and manufactured by the sub-contractors in Japan. All services for the design, fabrication, engineering and manufacture of the materials and equipment under Japanese Yen Portion I were made and completed in Japan. These services were rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to contractor's tax. " The person liable for the aforementioned importation of materials and equipment is the Department of Agriculture in its capacity as the Executing Agency of the Republic of the Philippines, pursuant to the provisions of the aforesaid GOJ-RP Exchange of Notes. Moreover, it is represented that the Department of Agriculture already paid the import taxes due thereon through Automatic Subsidy, apparently referring to the Certificate of Entitlement To Subsidy issued by the Fiscal Incentive Review Board (FIRB) to qualified Government entities, pursuant to Section 13 of the General Appropriation Act. CTaIHE Accordingly, your opinion that your taxable gross receipts shall not include the cost of the said importation is hereby confirmed. You are therefore liable to pay the 10% VAT on your gross receipts on the onshore portion, i.e. , net of importation. It is understood, however, that you shall not be entitled to input tax credit vis- - vis the VAT paid by the Department of Agriculture through fiscal subsidy, covering the aforesaid importation. Concerning the so-called VAT Reimbursement method under which the DA will pay only the actual input VAT, please be advised that we find no legal basis for it. The Value Added Tax is equivalent to ten percent (10%) of the gross value in money of the goods or properties sold, bartered or exchanged. (Section 106(A), Tax Code of 1997). Hence, the VAT is not assessed or collected on the basis of actual input VAT. Please coordinate with the Department of Agriculture for the early payment of this VAT portion and remit the same to the BIR in accordance with the above mentioned procedures, in order not to hamper the revenue collection efforts of this Bureau. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group