VAT Ruling No. 024-02

April 24, 2002 VAT RULING NO. 024-02 114 (C), 57 (B) VAT Ruling Nos. 080-2001, 106-99 Comsa, S.A Barcelona, Edificio Numancia 1 Calle Viriato 47 08014 Barcelona, Spain Attention: Mr. Gregory K. Ferris Asia Representative Gentlemen : This refers to your letter dated March 12, 2000, the pertinent portion of which is quoted as follows: "This is in connection with the LRT LINE 1 TRACK MAINTENANCE AND BALLAST RENEWAL PROJECT Supplemental Works which is financed by the Japan Bank for International Cooperation (JBIC). "We submitted our bid to the Chairman of the Prequalification, Bids and Awards Committee (PBAC) of the Light Rail Transit Authority (LRTA) on December 06, 2000. The PBAC will soon issue a Notice of Award to our company any time this month." " In this regard, we would like to request for an exemption of the 8.5% Creditable Withholding on Value-Added Tax (VAT) and also the 1.0% Creditable Expanded Withholding on Income." (Emphasis supplied) that per LRTA letter dated September 8, 2000 addressed to Mr. Gregory K. Ferris, "the said supplemental works will be financed partly by the Japan Bank for International Cooperation (JBIC) and the remaining balance from the LRTA's corporate funds";that we quote Item III(3)(1)(2) of the Philippine and Japanese Notes on the 18th and 19th Japanese Yen Loan Packages signed by Secretary Roberto R. Romulo and Ambassador Yoshifumi Matsuda on November 7, 1994, thus: "3.(1) 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 I and Loan II as well as interest accruing therefrom. (2) 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 Loan I and the Loan II." that List A of the said Philippine and Japanese Notes included the Metro Manila LRT Line 1 Capacity Expansion Project as one of the projects covered; and that on June 21, 2001 the LRTA and COMSA Empressa Constructora, a foreign Spanish corporation which is authorized and licensed to do business in the Philippines, executed a Contract for the Implementation of LRT Line I Track Maintenance and Ballast Renewal Project Supplemental Works. In support of your request, you submitted to this Office the following documents, to wit: "1. PBAC Secretariat Letter Addressed to Mr. Gregory K. Ferris regarding Invitation to Bid for the Project. "2. Letter of Atty. Aurora A. Salvaa to Mr. Gregory K. Ferris regarding the Issuance of Bid Documents. "3. Submission of the Bid Proposal to the Chairman of PBAC of LRTA on December 06, 2000. "4. Philippine and Japanese Notes on the 18th and 19th Japanese Yen Loan Packages signed by Secretary Romulo and Ambassador Matsuda on November 7, 1994." In reply, please be informed that as amplified under Revenue Memorandum Circular (RMC) No. 42-99 dated June 2, 1999, OVERSEAS ECONOMIC COOPERATION FUND or OECF (now JAPAN BANK FOR INTERNATIONAL COOPERATION or JBIC) 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% VAT withholding prescribed under Section 114(C) of the Tax Code of 1997 for government public works contractors undertaking JBIC Funded Projects, irrespective of the nationality of the contractor (VAT Ruling Nos. 080-2001, 106-99). 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. It shall be understood that the exemption does not cover the remaining balance of the supplemental works to be paid from LRTA's corporate funds. Further, it should be clarified that notwithstanding the non-imposition of the advance VAT withholding, both Japanese and Filipino or non-Japanese contractors engaged in JBIC-funded projects remain subject to the normal 10% VAT by way of output tax. Public works contractors (such as COMSA) shall be allowed a presumptive input tax equivalent to one and one-half percent (1 %) of the contract price with respect to government contracts only in lieu of actual input taxes therefrom pursuant to Section III (B)(2) of the Tax Code of 1997, as implemented by Section 4.105-1(b)(2) of Revenue Regulations No. 7-95, as amended by Revenue Regulations No. 6-97. Please note that it is only the advance 8.5% VAT withholding that is connected with the non-tax utilization aspect of the loan under the first clause of the Exchange of Notes. The "tax assumption scheme",under the second clause which covers the withholding/income tax and VAT, operates only in favor of Japanese contractors or nationals as a special concession for the grant of the loan. On the other hand, the gross income payments of LRTA to COMSA, that are paid or payable or accrued/recorded as expense/asset in the payor's books, whichever comes first, shall be subject to 2% creditable withholding tax pursuant to Revenue Regulations No. 6-2001, as amended by Revenue Regulations No. 12-2001 (1% on payments made prior to October, 2001). Hence, COMSA shall be liable for the payment of income tax on any income arising from the project. The 1%/2% CWT may be used as tax credit against its income tax liability. This will, therefore, serve as the notice to the LRTA 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 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.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group