VAT Ruling No. 021-00

June 9, 2000 VAT RULING NO. 021-00 RMC 42-99 000-00 Embassy of Japan 2627 Roxas Boulevard Pasay City 1300 Attention: Hon . Tsukasa Kawada Minister and Economic Director Gentlemen : This refers to your letter dated February 11, 2000 requesting for the resolution of VAT issues with respect to Japanese Grant Aid Projects for the Philippines. It is represented that the Japanese Government provides to the Philippines grant assistance for development projects; that funding for this is available yearly, and for this year alone, the Japanese Government has committed a total amount of P3 billion for grant assistance to the Philippines; that unlike Yen Loan Package Program, this grant-aid is not subject to repayment; that it is however subject to the condition that no taxes will be imposed upon Japanese nationals, including juridical persons such as companies operating as suppliers, contractors, and/or consultants who are undertaking the projects funded by the grant; that this condition is properly stated under the Exchange of Notes which is duly signed by both governments; that however, in actual practice, Japanese contractors are made to shoulder the VAT inasmuch as domestic suppliers charge VAT to Japanese contractors; and the latter cannot help paying input VAT to the former when the latter purchase goods and services from them in order to implement a grant-aid project successfully; that some Japanese contractors have been requesting the Bureau of Internal Revenue (BIR) to refund input VAT or let the implementing agencies assume the same, but the BIR has not taken any action on these requests; that the Government of Japan is concerned that if this problem is not resolved quickly and effectively, the implementation of grant-aid projects in the Philippines may suffer. In reply, please be advised that under the Exchange of Notes for grant-aids by the Government of Japan and the Government of the Republic of the Philippines, the following tax incentives provisions are invariably present: "The Government of the Republic of the Philippines will take necessary measures: "To exempt Japanese nationals from customs duties, internal taxes and other fiscal levies which may be imposed in the Republic of the Philippines with respect to the supply of the products and services under the Verified Contracts; "To bear all the expenses, other than those covered by the Grant, necessary for the execution of the Project." Likewise, it is condition of the Grant that the same " will be used by the Government of the Republic of the Philippines properly and exclusively for the purchase of the products of Japan or the Republic of the Philippines and the services of Japanese or Philippine nationals . . . " Clearly, as part of the covenant, the Philippine Government has expressly consented that when said Japanese nationals are involved in the supply of products or services under the grant-aid project, they shall be entitled to exemption from taxes imposed in the Republic of the Philippines. TEAICc It is noted that the tax privileges granted under the Exchange of Notes for grant-aid project are similar in all respect with the tenor of the tax privileges granted under OECF-funded projects. In Revenue Memorandum Circular No. 42-99, this Office has already set forth the applicable tax treatment of Japanese nationals participating in OECF-funded projects in the Philippines, to the satisfaction of all parties concerned. In view thereof, this Office is of the opinion that the tax treatment laid down in said RMC 42-99 is, likewise applicable to the execution of Japanese Grant-Aid projects in the Philippines. In view hereof, this Office holds that, consistent with RMC 42-99, Japanese nationals are exempt from paying direct taxes, such as income tax in connection with the supply of products and services under the Grant-Aid Project. The concerned Japanese contractors shall likewise be exempt from the 8.5 creditable VAT withholding imposed on government contracts. However, as laid down in RMC 42-99, since the value added tax passed on by local contractors is in the nature of indirect tax, the Japanese nationals shall continue to bear the tax. In turn, the VAT portion shall be passed on to and be shouldered by the government agency/beneficiary of the grant which shall then pay the invoice billing of Japanese nationals with no further tax deduction and inclusive of the amount of the VAT. All other tax treatments laid down for OECF projects under RMC 42-99 shall likewise be applicable to Japanese Grant-Aid Projects. In this regard, we shall be coordinating with the Department of Budget and Management for the effective implementation of this scheme with the end view of completely freeing the Japanese nationals from the tax burden to which they are exempt by virtue of the agreement. DTSaIc Rest assured that this Office shall take the lead in coordinating efforts to resolve any issue in the implementation of this objective. Very truly yours, (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue