VAT Ruling No. 015-02

March 6, 2002 VAT RULING NO. 015-02 114 (C),57 (B) 000-00 CTI Engineering Co.,Ltd. 5th flr. VNP Building 479 Pedro Gil St.,Ermita Manila Gentlemen : This refers to your letter dated October 18, 2000, the pertinent portion of which is quoted as follows: "CTI Engineering Co.,Ltd. (CTIE, Japanese Consultant) in Joint Venture with Nippon Koei Co.,Ltd. (NK, Japanese Consultant),Woodfields Consultants, Inc. (WCI),PhilKoei International, Inc. (PKII) and Perconsult International (PI) is currently undertaking consultancy services for the KAMANAVA Area Flood control and Drainage System Improvement Project, which is a project of the Department of Public Works and Highways, and financed by the Japan Bank for International Cooperation (formerly OECF) under JBIC Loan Agreement No. PH-P212. CTI Engineering Co.,Ltd. assumes the lead firm of the Joint Venture. "This 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. In the light of the foregoing, may we request for a ruling that the Joint Venture of CTIE/NK/WCI/PKII/PI is not subject to the 8.5% Creditable VAT Withholding pursuant to RMC No. 42-99 dated June 2, 1999, and the one percent (1%) Expanded Withholding Tax in compliance with the BIR Ruling No. DA-568-98 dated December 29, 1998." And that in support of your request, you submitted to this Office the following documents, viz: 1. Cover Page of Loan Agreement No. PH-P212 (April 7, 2000); 2. Contract Agreement between GOP and CTIE/NK/WCI/PKII/PI (August 30, 2000); 3. JBIC Concurrence to the Contract Agreement (September 18, 2000);and 4. Joint Venture Agreement (August 30, 2000). 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 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." RMC No. 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 construction of KAMANAVA Area Flood Control and Drainage System Improvement Project is being undertaken by a consortium composed of both Japanese and Filipino corporations will not invalidate the tax-free treatment of the fund. For that matter, even if only Filipino corporations or nationals happen to be the main contractor of the project, the same tax-free treatment should prevail. 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 Department of Public Works and Highways could properly recognize the non-imposition of the 8.5% VAT withholding to the Joint Venture of CTIE/NK/WCI/PKII/PI. With respect to the exemption from the one percent (1%) withholding tax, this Office has already held that, for being a joint venture or consortium formed for the purpose of undertaking construction projects, the Joint Venture of CTIE/NK/WCI/PKII/PI is not considered as a taxable corporation in itself, hence gross payments by the Department of Public Works and Highways to the former is not subject to the expanded withholding tax prescribed under Section 57(B) of the Tax Code of 1997 (BIR Ruling No. 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, a Filipino contractor performing OECF-funded projects, such as WCI, PKII and PI, remain subject to income tax. But by virtue of the second clause under the Exchange of Notes be assumed by the Department of Public Works and Highways, they being Japanese corporations doing an OECF Funded Project, thereby entitling it to the coverage of the above-cited agreement. For purposes of the Value-Added Tax, the invoice billing of the joint ventures shall remain subject to the ten percent (10%) VAT but consistent with the Exchange of Notes, such billings shall not be subject to the 8.5% creditable withholding VAT prescribed under Sec. 114(C) of the Tax Code of 1997. However, since the tax assumption/exemption facility is particularly applicable only to Japanese contractors or nationals pursuant to the Exchange of Notes, Filipino contractors (and other non-Japanese contractors) shall not be benefited by this privilege and therefore shall remain subject to VAT based on the gross receipts derived from services rendered under this contract/project. This will, therefore, serve as the notice to the Department of Public Works and Highways insofar as it is concerned. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group