VAT Ruling No. 008-03

January 10, 2003 VAT RULING NO. 008-03 Sec. 108 VAT Ruling 004-01 Mitsubishi Kawasaki Toyo Joint Venture Mindanao Container Terminal Project Sugbongcogon, Tagoloan Misamis Oriental Attention: Mr. Eiji Okumura Administration Manager Gentlemen : This refers to your letter dated July 30, 2002, requesting for resolution of certain tax issues with respect to the construction project called the Mindanao Container Terminal Project (MCTP). TDAcCa It is represented that the Mitsubishi-Kawasaki-Toyo Joint Venture (MKT-JV) is a construction joint venture which was awarded a government project known as the Mindanao Container Terminal Project (MCTP) in Tagoloan, Misamis Oriental, with PHIVIDEC Industrial Authority (PIA), as the implementing government agency; that this project is funded by the Japan Bank for International Cooperation (JBIC) through an agreement entered by the Governments of the Republic of the Philippines and Japan by way of official Exchange of Notes; that, the following are excerpts of relevant information in connection with this project: " Project Background "The Mindanao Container Terminal Project (MCTP) is a construction project funded by the JBIC, with the exception of the tax portion representing VAT. As per the Exchange of Notes, which among others, provides that the taxes associated with the project shall be assumed by the Philippine Government, the Tax Portion becomes the responsibility of the Philippine Executing Agency and is to be covered by a peso counterpart fund provided by PIA. xxx xxx xxx "The JBIC fund for the project is composed of the Yen Portion and the Peso Portion . The Philippine counterpart fund is denominated as the VAT Portion . Because the VAT Portion will be paid to us separately from the amount of the contract price, we will therefore receive an amount which is exclusive of VAT at one time (JBIC Fund) and another amount which is 100% VAT at another time (VAT Portion). xxx xxx xxx "Project Execution "In the execution of the project, there will be two major cost components service component (local construction) and imported component (importation of materials and equipment). "The MKT-JV will purchase goods and services from local suppliers and in the process, the joint venture will be passed on with corresponding input taxes. As explained above, these input taxes will be recovered through the VAT portion which PIA will pay to the MKT-JV as part of the contract price. "A significant portion of the contract amount represents cost of materials/equipment to be imported by MKT-JV for the project. If MKT-JV is the importer, it will be paying 10% VAT on importation and will be entitled to claim the corresponding input taxes. However, in this case, PIA was granted an automatic subsidy on all importation for the project such that it will now be the importer/consignee and assume all the VAT on importation through its subsidy. But it is only the VAT on importation that is assumed by PIA since the cost of goods imported will still be accounted and paid for by the MKT-JV. "Because PIA is to assume the VAT on importation, it now intends to deduct the amount of VAT covered by their import subsidy from the VAT Portion of the contract. This now presents a complication since under normal VAT rules, the MKT-JV is supposed to report the total contract amount and declare the corresponding output tax. For example, if the service component amounts to P20M and imported component P80M, then the total gross receipts would be P100M thus MKT-JV should report an output tax of P10M. This P10M is supposed to be the VAT Portion which MKT-JV will receive separately as part of the contract price. Now, if PIA is credited with an input tax on importation of P8M and deducts this tax subsidy from the P10M VAT Portion, then the MKT-JV will end up having only P2M actual and net VAT Portion received. But then under the normal VAT rules MKT-JV will still be liable to an output tax of P10M which is not supposed to be the case. "Issues "In the light of the foregoing, may we request the following resolutions: "1. Strictly for VAT reporting purposes, the gross receipts of the MKT-JV shall only consist of the service component since the VAT on imported component is to be paid for and accounted by PIA through its automatic tax subsidy. xxx xxx xxx "2. As an alternative to the above, MKT-JV shall declare the entire gross receipts (Service Component plus Imported Component) in the VAT return but shall treat the Imported Component as exempt transaction under Section 109(q) of the Tax Code of 1997. xxx xxx xxx "3. VAT payments per VAT returns filed will be deferred until actual receipt of the VAT Portion from PIA, following BIR VAT Ruling No. 004-01, February 16, 2001, " . . . hence the Japanese contractors are hereby allowed to file their said VAT returns within the time prescribed by law, provided, however, that payment of the VAT due thereunder is hereby extended, without imposition of penalty for 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." "4. PIA's payment of the VAT Portion is not part of gross receipts of MKT-JV since this merely constitutes the tax reimbursement under the Exchange of Notes." In reply, please be informed as follows: 1. The aforesaid EXCHANGE OF NOTES between the Government of Japan and the Republic of the Philippines, with the PHIVIDEC Industrial Authority as RP's Executing Agency, is an Executive Agreement which forms part of the law of the Philippines. Moreover, 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, your request to pay the VAT thereon within ten (10) days after receipt from PIA of the amount intended for the VAT PORTION is hereby granted, pursuant to the provisions of the said GOJ-RP Exchange of Notes, in relation to the above quoted VAT RULING No. 004-01, dated February 16, 2001. 2. The facts obtaining in this 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. " cICHTD The person liable for the aforementioned "Imported Component" is the PIA, 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 PIA will pay the import taxes thereon through fiscal 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. Accordingly, your opinion that your taxable gross receipts shall not include the "Imported Component" is hereby confirmed. It is understood, therefore, that you shall not be entitled to input tax credit vis--vis the VAT on the said importation paid by the PIA through fiscal subsidy. Please coordinate with the PIA 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. In this regard, we hereby confirm that the payment by PIA of the VAT portion does not form part of the gross receipts of MKT-JV since this merely constitutes the tax reimbursement under the Exchange of Notes. 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 & Inspection Group