VAT Ruling No. 024-00

July 27, 2000 VAT RULING NO. 024-00 RMC 42-99 012-00 SGV & Co . 6760 Ayala Avenue 1226 Makati City Attention: M . F . A . Balili Tax Division Gentlemen : This refers to your letter dated December 24, 1999, requesting, in behalf of your client, MTOB Consortium (Consortium), for confirmation of your opinion that (1) the payments to MTOB Consortium by Manila International Airport Authority (MIAA) for the construction of the NAIA Terminal 2 (the Project) are not subject to the 8.5% creditable withholding Value-Added Tax (VAT) and (2) the Consortium is entitled to the refund of excess VAT payments pursuant to Revenue Memorandum Circular No. 42-99. It is represented that the MTOB Consortium consists of Tokyu Construction Co., Ltd. (Tokyu), Mitsubishi Corporation (Mitsubishi), BF Corporation (BF) and AM Oreta & Co., Inc. (AMO); that Tokyu and Mitsubishi are corporations duly organized and existing under the laws of Japan and duly licensed to do business in the Philippines, while BF and AMO are both domestic corporations engaged in construction business; that the Consortium won the bid for and was awarded the NAIA Terminal 2 Project which is funded by a Loan from the Overseas Economic Cooperation Fund of Japan (OECF) and which loan is covered by an Exchange of Notes executed by and between the Government of Japan and of the Government of the Republic of the Philippines; that on November 9, 1995, the Consortium and MIAA executed an agreement for the performance of the Project which is 75% funded by the OECF and with 25% counterpart fund in pesos by the Philippine Government. It is further represented that all payments made by MIAA to the Consortium were subjected to the 10% VAT; that initially, MIAA withheld the 8.5% creditable VAT on all its payments to the Consortium pursuant to Section 114(C) of the Tax Code of 1997 and paid the same to the BIR from the counterpart fund from the Philippine Government; that as a result of the 8.5% VAT withholding, the Consortium generated a substantial amount of unutilized creditable VAT since the 8.5% creditable VAT withholding and its input VAT credits far exceeded the Consortium's output VAT liability; that on June 2, 1999, RMC 42-99 was issued providing for the exemption of Japanese contractors undertaking OECF funded projects from the 8.5% creditable VAT imposed under Section 114(C) of the Tax Code, income tax, and from the 1% withholding tax imposed under Section 2.57.2(E) of Revenue Regulations No. 2-98 implementing Section 57(B) of the Tax Code. 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." "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." AHCaES 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 National Internal Revenue 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. Since the construction of the NAIA Terminal 2 is an OECF-funded project, MIAA should not impose the 8.5% creditable VAT withholding prescribed under Section 114(C) of the Tax Code of 1997 from the invoice billing of the said Consortium. The fact that the NAIA Terminal 2 Project is being undertaken by a consortium composed of both Japanese and Filipino corporations will not invalidate the tax-free treatment of the loan. 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 concerned. Hence, this Office is of the opinion, and so holds, that, MIAA could properly recognize the non-imposition of the 8.5% VAT withholding from the invoice billing of the MTOB Consortium. 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 payments by the MIAA to the former 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-ventures 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 contractors involved in the OECF-funded NAIA Terminal 2 Project, i.e., BF Corporation and A.M. Oreta & Co., Inc., remain subject to income tax. But by virtue of the second clause under the Exchange of Notes cited above, the income tax pertaining to the project and accruing to Tokyu Construction Co., Ltd. and Mitsubishi Corporation, shall be assumed by MIAA since both are Japanese corporations doing an OECF-funded project and are thus entitled to the coverage of the above-cited agreement. Finally, since the MIAA initially subjected the payments made to the MTOB Consortium to the 8.5% creditable VAT withholding, the latter is entitled to claim for refund of its excess VAT credits. As clarified under RMC 42-99, if the VAT returns of the Japanese contractors show that there are still excess VAT payments, after applying the 8.5% creditable VAT previously withheld from the VAT due, then such excess VAT payment constitutes taxes erroneously paid and received. Pursuant to Section 204(C) of the Tax Code of 1997, such excess tax payment shall be refunded or credited to the MTOB Consortium, either in cash or Tax Credit Certificate as the case may be, at the option of the claimant subject, however, to the filing of the corresponding claim with the Commissioner or with the Court of Tax Appeals within the two year prescriptive period mandated by law. 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.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group