VAT Ruling No. 008-04

April 5, 2004 VAT RULING NO. 008-04 RMO 42-99; VAT Ruling No. 091-02 Taisei Corporation Philippine Branch 23rd Floor, Equitable Bank Tower, Paseo de Roxas Salcedo Village, Makati City Attention: Tsutomu Yamazaki Resident Agent and Administration Manager Gentlemen : This refers to your letter dated March 12, 2004 stating that Taisei Corporation in joint venture with Shimizu Corporation, both Japanese construction firms registered at the Securities and Exchange Commission (SEC) to do business in the Philippines, was awarded the construction of the New Iloilo Airport Development Project (NIADP) under the Department of Transportation and Communications (DOTC) for a total contract amount of P6,849,491,528.00 broken down into P4,625,597,955.00 converted into Yen which is 100% funded and remitted by Japan Bank for International Cooperation (JBIC) to a Bank Account in Japan representing the Yen portion, P1,601,212,528.00 representing the Peso portion and 98% of which is also funded and paid via telegraphic transfer to a Local Bank account while the 2% of which is Government of the Philippines (GOP) portion paid through checks by DOTC, and the VAT portion equivalent to P622,675,081.00 representing 10% for both the Peso and Yen portions to be assumed and paid in Philippine pesos by DOTC also through checks; that the NIADP being a JBIC funded project, was included in the August 25, 2000 Exchange of Notes between the Government of Japan (GOJ) and the Government of the Republic of the Philippines (GRP) that under the said Exchange of Notes (which are basic and standard clauses in the previous and subsequent Exchange of Notes) Paragraph III5: "(2) The Government of the Republic of the Philippines will, by itself or through its executing agencies, assume: (a) All fiscal levies and taxes imposed in the Republic of the Philippines on the Japanese companies operating as suppliers, contractors and/or consultants with respect to the income accruing from the supply of the products and/or services required for the implementation of the projects enumerated in the List; and "(3) In connection with such tax assumption, the Government of the Republic of the Philippines or its executing agencies will be responsible for the liquidation or settlement of such levies, duties, taxes and other similar charges." that based on this, the VAT amounting to P622,681,048.00 being imposed in the Philippines was computed separately from the total project cost; that the Government of the Republic of the Philippines or in this case, the DOTC, being the government executing agencies, shall be responsible for the liquidation or settlement of such tax; that it is your contention and understanding that you, as the joint venture contractor, are not actually liable to the VAT, but the Government of the Republic of the Philippines; that any excess VAT collected from the government executing agency over the VAT paid to the supplier shall be remitted back to the BIR; that the GRP Implementing agencies could not liquidate and pay the VAT to the Japanese Contractors on time due to lack of funds or delay in the remittances of their fiscal budgets; that the Japanese contractors, even after advancing the VAT to their suppliers for the purchase of materials and services, could not collect the VAT due from the executing agency and that excess creditable VAT actually remains in their books for a long period of time; that this, technically, results in an overpayment of VAT by the Japanese contractors until and when the said VAT is liquidated by the executing agency. Based on the foregoing representations, you now request that you be allowed to apply either of the following alternative courses of action, to wit: "1. The VAT returns shall be prepared and filed with the BIR for every collection or liquidation of VAT by the executing agency; "2. File the VAT returns as required and present the unliquidated VAT by the executing agency as creditable withheld VAT; or "3. Is VAT Ruling No. 004-01 also applicable in this case where monthly VAT returns will be filed as required, but no payment to the BIR until and when collected from the liquidating agency." In reply thereto, please be informed that under Revenue Memorandum Circular No. 42-99 dated June 21, 1999, Overseas Economic Cooperation Fund (OECF) [now Japan Bank for International Cooperation] (JBIC) funded projects are covered by the standard clauses of the Exchange of Notes between the Japanese Government and the Republic of the Philippines, viz. : "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." In interpreting the aforesaid circular, the BIR in numerous rulings 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 No. 091-02 dated December 19, 2002 ) The above-cited ruling is a reiteration of VAT Ruling No. 024-02 dated April 24, 2002, wherein this Office discussed the two (2) underlying principles governing the JBIC Funded Projects, as follows: (1) Non-utilization of the loan for local taxes Disbursements under the loan shall be exclusively used for the approved projects and shall not be used for, nor diminished by, taxes, duties and other fiscal charges. This principle is likewise applicable to Filipino contractors/non-Japanese contractors. (2) Tax assumption scheme All direct taxes otherwise due from Japanese contractors and nationals shall be assumed by the executing government agency and/or project beneficiary. This provision is applicable only to Japanese contractors. Thus, as to the non-utilization aspect of the loan, the principle is applicable not only to Japanese contractors but also to Filipino contractors, or other nationals (non-Japanese) performing OECF (JBIC) Funded Projects since that condition is not dependent upon the nationality of the project contractor. On the other hand, the tax assumption scheme under the second clause which covers the withholding/income tax and VAT operates merely in favor of the Japanese contractors or nationals under the Exchange of Note. Accordingly, Filipino contractors or non-Japanese contractors are not exempt from withholding tax, income tax or the regular 10% VAT when undertaking OECF-funded projects. Accordingly, the above-mentioned VAT Rulings shall be applied as follows: 1. The joint venture formed by Taisei Corporation and Shimizu Corporation for the construction of the NIADP shall file the prescribed VAT returns of gross receipts derived from JBIC-funded projects, claim their input taxes generated from the 8.5% creditable withholding VAT as well as those generated from VAT-registered suppliers and subcontractors attributable to its JBIC funded projects in computing its output tax liabilities. 2. Taisei Corporation and Shimizu Corporation undertaking the construction of NIADP, a JBIC funded project, the invoice billings of the Japanese contractors with the executing government agencies are exempt from the 8.5% a creditable VAT imposed under Section 114(C) of the Tax Code of 1997. Accordingly, the DOTC, as the executing government agency of the Philippine government shall not withhold the 8.5% creditable VAT from the said billings of the Japanese contractors. On the other hand, since the executing government agency assumes payment of the income taxes due from the Japanese contractors or nationals by virtue of the Exchange of Notes, the 2% creditable withholding tax shall not be deducted from the income payments to the Japanese contractors of nationals. Instead, the executing government agency shall assume the payment thereof out of its own funds. SUCH BEING THE CASE, this Office holds that the first two (2) courses of action are not legally tenable, since the persons liable for the filing of VAT returns and payment thereof are the sellers or transferors of goods, properties or services pursuant to Section 105 of the Tax Code of 1997 and not DOTC, the executing agency, which remains the buyer or transferee to whom the VAT is shifted or passed on. However, since the circumstance in this case is in all fours similar to VAT Ruling No. 004-01 dated January 15, 2001, this Office reiterates its stance that the procedure stated therein and claimed as third course of action is applicable to the instant case. HIEASa 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, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group