VAT Ruling No. 023-02

April 18, 2002 VAT RULING NO. 023-02 VAT Ruling 110-99 000-00 Zenitaka Corporation 23rd Floor, Tower 2 The Enterprise Center 6766 Ayala Avenue, Makati City Attention: Mr. Shinsuke Chatani, Adm. Officer Gentlemen : This refers to your letter, dated December 20, 2001, concerning the 10% VAT on your sale of service to the National Irrigation Administration (NIA). It is represented that the Government of Japan (GOJ) and the Republic of the Philippines (RP) entered into an Executive Agreement under GOJ-RP Exchange of Notes, signed on June 27, 2001, under which the GOJ extended GRANT AID to the RP, through the National Irrigation Administration (NIA), as RP's Executing Agency, for the "Rehabilitation of Apron at Angat Afterbay Regulatory Dam," known as the Project ; that, this Grant Aid is not subject to repayment, hence, a donation by the GOJ to the RP; that, Paragraph 6 of the said GOJ-RP Exchange of Notes provides, among others: "6.(1) . . . (2) (a) The Government of the Republic of the Philippines will exempt Japanese nationals from all duties and related fiscal charges which may be imposed in the Republic of the Philippines with respect to the import of the products and services supplied under the Verified Contracts; "(b) The Government of the Republic of the Philippines will, by itself or through its executing agencies, assume all fiscal levies and taxes imposed in the Republic of the Philippines on Japanese nationals with respect to the payment carried out for and the income accruing from the supply of the products and services under the Verified Contracts ; and "(c) In connection with sub-paragraphs (a) and (b) above, the Government of the Republic of the Philippines or its executing agencies will be responsible for the prompt liquidation or settlement of such fiscal levies, duties, taxes and other similar charges . "xxx xxx xxx." that, accordingly, the cost of the 10% value added tax (VAT) vis-a-vis your sale of service to the NIA, as the Executing Agency of the RP, shall be borne, assumed and paid for by the NIA; that, in your execution of the said Project, you have been passed-on with 10% Input VAT by your local VAT-registered suppliers; that, since the 10% VAT on the said Project shall be assumed and paid for by the NIA, you informed the NIA that it has to pay through you the 10% VAT on the said Project; that, however, the NIA accounting people believed that the NIA shall directly remit, to the BIR, the said 10% VAT instead of paying the same through your corporation. In reply, please be informed that the tax exemption clause of the above mentioned GOJ-RP Exchange of Notes does not include the 10% VAT on your sale of service to the NIA. It simply means that the 10% VAT on the said project shall be borne, assumed and paid by the Republic of the Philippines, out of its own funds, through the NIA, its Executing Agency for this Project. This case is similar to the VAT issue raised in the case of the Government of Japan Grant Aid to the Department of Health, as Executing Agency of the Republic of the Philippines, which was resolved under VAT RULING NO. 110-99, dated December 02, 1999, as follows: "a.) The suppliers and sub-contractors of the Japanese contractors shall bill and pass on the 10% VAT to the said Japanese contractors. The Japanese contractors, in turn, shall bill and pass on the 10% VAT to the concerned executing agencies of the Philippine government . Thus, billings to the executing government agencies shall be deemed inclusive of VAT. Since, under the said Exchanges of Notes, the Philippine Government obligated itself to make necessary measures to exempt Japanese nationals involved in the said Projects from internal revenue taxes, then the VAT is to be paid out of the Philippine counterpart fund. [RMC 42-99 (A) (2)]. "b.) The Japanese contractors or nationals shall file the prescribed VAT returns on the gross receipts derived from the said Projects, claim their input taxes from their purchases of goods, properties and services from their suppliers or sub-contractors, and shall pay the VAT thereon, after offsetting the allowable input taxes, considering that the amount intended for payment of the VAT has already been collected and received by the Japanese contractors or nationals from the executing government agencies as part of the total invoice price . [RMC 42-99 (A)(3)]. "xxx xxx xxx" Accordingly, the above quoted rules shall also be applicable to your case. Very truly yours, (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group