VAT Ruling No. 009-04

April 5, 2004 VAT RULING NO. 009-04 RMC 42-99 VAT Ruling 092-2002 C.M. Pancho Construction, Inc. 71-A Scout Borromeo Street Diliman; Quezon City Attention: Engr. Gerardo V. Pancho President Gentlemen : This refers to your letter dated February 18, 2004, requesting confirmation of the previous rulings of this Office to the effect that a Filipino construction company engaged in Yen Loan or JBIC-funded infrastructure project is not subject to the 8.5% VAT withholding on all invoice billings, and that additionally, said exemption is applicable whether the invoice billing is paid for in Yen Loan (JBIC Fund) or through Philippine counterpart fund (GOP Fund). It is represented that C. M. Pancho Construction, Inc. (CMPCI) is a Filipino-owned corporation engaged, among others, in foreign-assisted public works construction projects; that as a result of competitive public bidding, CMPCI has been awarded by the Department of Public Works & Highways (DPWH) contracts for the following JBIC-funded projects: 1. Bongabon-Baler Road Improvement Project Implementation of Civil Works for Contract Package 4, Bazal-Ma. Aurora San Luis Section, under the Arterial Road Link Development Project, Phase III (Bongabon-Baler Road Improvement Project), Km. 219\900 to Km. 234/353.76, located in Aurora Province, JBIC L/A No. PH-P188. 2. Bohol Circumferential Road Improvement Project . Implementation of Civil Works for Contract Package 2, Dandijay Jagna-Valencia Section under the Arterial Road Links Development Project, Phase IV, (Bohol Circumferential Road Improvement Project), JBIC Loan Agreement No. PH-P204, Sta. 169 + 240 to Sta. 221 + 040.00, located in Bohol Province. 3. Agno River Flood Control Project . The Construction of the Agno River Flood Control Project, Phase II, Package III, Social Development for Poponto Retarding Basin in the Province of Pangasinan, JBIC Loan Agreement No. PH-193 & PH-223. that said projects are mainly funded by foreign financial assistance from the Japan Bank for International Cooperation (JBIC) ; that under JBIC Loan Agreement PH-P188 ( Bongabon-Baler Road Improvement Project ) the payment for the total project cost shall be at 73% against the loan and 27% by the Government of the Philippines (GOP Fund); while under JBIC Loan Agreement No. PH-P204, ( Bohol Circumferential Road Improvement Project ), 87% of the total project cost shall be charged against the loan, while 13% shall be accounted for by the Government of the Philippines or GOP Fund; that under JBIC loan Agreement No. PH-193 & PH-223, ( Agno River Flood Control Project ) 88% of the total project cost shall be charged against the loan fund, while 12% shall be accounted for by the GOP Fund; that it is the contention of the DPWH that the non-imposition of the 8.5% VAT withholding on JBIC-funded projects is applicable only to payments out of Yen Loan and not from payments from the counterpart GOP funds, hence all invoice billings to be paid out of GOP funds shall be net of 8.5% VAT withholding; hence this request. EHSIcT In reply, we confirm that under Revenue Memorandum Circular (RMC) 42-99 which implements the Exchange of Notes for Yen Loan Funded Projects, it was established that the executing government agencies should not impose the 8.5% creditable VAT withholding prescribed under Section 114(C) of the Tax Code of 1997 for invoice billings of Japanese contractors undertaking JBIC-funded projects. This is in order to fully comply with the international agreement governing such project, although the gross receipts of such contractors remain subject to the regular 10% VAT. ( VAT Ruling Nos. 106-99; 110-99; 012-00; 021-00; 024-00; 015-02; 023-02; 092-02. ) As the said RMC provides, the exemption from the 8.5% VAT withholding is without distinction as to payment sources, thus: "A) VALUE-ADDED TAX: "1. The invoice billings of the Japanese contractors with the executing government agencies are exempt from the 8.5% creditable VAT withholding prescribed under Section 114 (C) of the National Internal Revenue Code of 1997 (then section 110(c) , old NIRC) as provided for in Revenue Memorandum Circular No. 32-99. Accordingly, the executing agencies of the Philippine government shall not withhold the 8.5% creditable VAT from the said billings of the Japanese contractors. The non-imposition of the 8.5% VAT withholding should be applicable to the entire gross billing for the JBIC-funded project comprising of both Yen Loan Payment and particularly on GOP Funds. In the first place, the duty to withhold the 8.5% creditable VAT is directed only to payments made by the government out of funds it controls and possesses and could not apply to payments out of foreign loans which, in this case, are disbursed and controlled by the JBIC or the Government of Japan. Hence, the exemption from the 8.5% VAT withholding actually pertains to the Philippine counterpart fund or GOP Fund, as otherwise, there will be no occasion to apply such exemption. Moreover, and as previously held by this Office, the invoice billings of Filipino contractors for JBIC-funded projects are likewise entitled to exemption from the 8.5% VAT withholding. The basis for such exemption is to fully comply with the provision of the international agreement that the loaned fund " shall not be used for, nor diminished by taxes, duties and other fiscal charges " and this condition on the use of such loan fund applies, irrespective of the nationality of the contractor . . . ". ( VAT Ruling Nos. 106-99, 080-2001, 024-02 ). Hence, the rule now is that no 8.5% VAT withholding will be imposed on JBIC-funded projects irrespective of the nationality of the contractor. ( BIR Ruling DA-176-03 dated June 5, 2003; BIR Ruling DA-202-03 dated June 30, 2003 ) It bears to emphasize, however, that insofar as JBIC-funded projects are concerned and following established rulings on the matter, it is only from the 8.5% VAT that the Filipino contractors are exempt from, and they remain subject to the following taxes or impositions: the regular 10% VAT on gross receipts derived from the project (as do Japanese contractors); corporate income tax (only Japanese contractors or nationals are entitled to invoke the "Tax Assumption Scheme" under the Exchange of Notes); 2% expanded withholding taxes (if the contractor is not a construction joint venture). Accordingly, your invoice billings for your JBIC-funded projects, namely: 1) Bongabon-Baler Road Improvement Project; 2) Bohol Circumferential Road Improvement Project; and 3) The Agno River Flood Control Project, whether paid out of Philippine counterpart fund or not, shall remain exempt from the 8.5% creditable VAT withholding but subject to the regular 10% VAT on gross receipts derived from the project, corporate income tax, and 2% expanded withholding taxes. This will serve as the notice to the Department of Public Works and Highways (DPWH), insofar as it is concerned. This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, it will be found that the facts are different, then this ruling shall be deemed null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group