VAT Ruling No. 012-00

March 7, 2000 VAT RULING NO. 012-00 RMC 42-99 DA 586-98 Toyo Construction Co ., Ltd . 4th Floor Princess Building 104 Esteban St., Legaspi Village Makati City Attention: Mr . Shuichi Morita General Manager, Phil Branch Gentlemen : This refers to your letter dated February 11, 2000 requesting for a ruling that the TOYO-PNCC Joint Venture is not subject to the 8.5% creditable VAT withholding and to the 1% expanded withholding tax. It is represented that TOYO-PNCC Joint Venture is currently undertaking the Agno and Allied Rivers Urgent Rehabilitation Project (AARURP) Phase-1, a project of the DPWH Pangasinan; that the said project is being financed by the Japan Bank for International Cooperation (formerly OECF) under OECF Loan Agreement No. PH-P155; that the project is being undertaken by the Joint Venture of Toyo Construction Co., Ltd., a Japanese contractor and Philippine National Construction Corporation (PNCC), a Filipino contractor; that Toyo Construction Co, Ltd. is the lead firm of the Joint Venture; and that the project is covered by a standard Exchange of Notes between the Philippine and Japanese governments for non-utilization of loaned amount to pay taxes and the assumption of tax by the participating government agency. Based on the foregoing, you now request for a ruling that the Joint Venture of TOYO-PNCC is not subject to the 8.5% Creditable VAT Withholding pursuant to RMC No. 42-99 dated June 2, 1999 and the 1% Expanded Withholding Tax in compliance with BIR Ruling DA-586-98 dated December 29, 1998. In reply, please be informed that, as amplified under Revenue Memorandum Circular No. 42-99 dated June 2, 1999, OECF Funded Projects are covered by the standard clauses of the Exchange of Notes between the Japanese Government and the Republic of the Philippines which read as follows: "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 Loan, as well as interest accruing therefrom. TIEHSA 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." RMC 42-99 established that under the first clause cited above, it is the intention of the two governments not to use the proceeds of the loan in the payment of all fiscal levies or taxes imposed by the Philippines. In view thereof, this Office held 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 government public works contractors undertaking OECF-funded projects. Otherwise, the covenant not to subject the funded amount to taxes, which is the clear intent of both the Philippine and the Japanese Governments under the Exchange of Notes, might be violated. The fact that the OECF funded project is being undertaken by a consortium composed of both Japanese and Filipino corporations will not invalidate the tax-free treatment of the fund. Verily, the above-cited first clause of the Exchange of Notes is particularly directed towards the non-utilization of the loan amount in the payment of taxes and is not dependent upon the nationality of the project contractor. Hence, this Office is of the opinion, and so holds, that the TOYO-PNCC joint venture undertaking the Agno and Allied Rivers Urgent Rehabilitation Project, is not subject to the 8.5% VAT withholding. With respect to the exemption from the 1% withholding tax, this Office has already held that a joint venture or consortium formed for the purpose of undertaking construction projects is not considered as a taxable corporation in itself, hence gross payment to it is not subject to the expanded withholding tax prescribed under Section 57(B) of the Tax Code of 1997 (BIR Ruling DA 586-98 dated December 29, 1998). However, each of the co-venturers is liable for the payment of their respective corporate income taxes under Sections 27 and 28 of the Tax Code of 1997 pertaining to the separate earnings each will derive from the above-mentioned projects. Hence, the Filipino co-venturer involved in the Agno and Allied Rivers Urgent Rehabilitation Project, i.e, Philippine National Construction Corporation remain subject to income tax. But by virtue of the second clause under the Exchange of Notes cited above, the income tax pertains to the project and accruing to Toyo Construction Co., Ltd., shall be assumed by DPWH, since the former is a Japanese corporation doing an OECF (now JBIC)-funded project and thus entitled to the coverage of the above-cited agreement. TCASIH 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.) SIXTO S. EQUIVIAS IV Deputy Commissioner Legal & Enforcement Group