VAT Ruling No. 025-98

September 4, 1998 VAT RULING NO. 025-98 Sec. 102 (2); Sec. 102 (b) (a)-000-025-98 ACMDC Ventures Incorporated 125 M. Velez & Osmea Streets Capitol Site, Cebu City Attention: Mr . Lorenzo C . Pedrosa , Jr . Vice-President Finance and Treasury Gentlemen : This refers to your letter dated October 21, 1997 addressed to the Chief, Legal Branch, BIR-Region 13, Cebu City, requesting on behalf of Atlas Itochu Consortium (AIC), for a subject ruling on the following: "1. Is the Yen portion of the above-mentioned contracts which were collected from 1993 to 1995 by the Consortium and sub-contractors exempt from Value-added Tax? I would like to seek confirmation of the applicable VAT regulations pertaining to the exemption of foreign currency payments from VAT. "2. In view of the implementation of the Expanded Value Added Tax Law, is the Yen portion of the above-mentioned contracts collected after December 1995 subject to VAT? If it is subject to VAT, what are the applicable exemptions under the said EVAT Law which the consortium and the sub-contractors can avail of, if any?" It is represented that on April 5, 1993, AIC was awarded a contract by the Department of Transportation and Communications (DOTC) to undertake the repair, construction and development of the Mactan Cebu International Airport (MCIA); that the project was funded by the Overseas Economic Cooperation Fund (OECF); that in May 1993, AIC engaged the services of sub-contractors to undertake some portions of the construction works of the project the contract price of which also consisted of Philippine Pesos and Japanese Yen portions; that portions of the Schedule of Negotiation Agreement which forms part of the Agreement provide as follows, viz: "2.00 FINANCIAL "2.01 The Bid price is amended to: JAPANESE YEN FIVE BILLION, THREE HUNDRED AND THREE MILLION, ONE HUNDRED AND FORTY EIGHT THOUSAND AND SIXTEEN (5,303,148,016) AND PHILIPPINE PESOS ONE BILLION, FIVE HUNDRED AND FOURTEEN MILLION, FIVE HUNDRED AND EIGHTY TWO THOUSAND, TWO HUNDRED AND ELEVEN AND CENTAVOS NINETY SIX (P1,514,582,211.96) "2.02 Value Added Tax (VAT) is included within the above Philippine Peso Portion at the rate of ten (10) percent of the total amount of Philippine Pesos excluding only the Provisional Sums which are deemed to be inclusive of an allowance for VAT. "2.03 VAT is excluded from the above Japanese Yen portion on the assumption that this will be zero rated or that exemption will be obtained by DOTC." In reply, please be informed as follows: A. Contract Period from 1993 to 1995 The applicable law during the contract period from 1993 to 1995 was Section 102(2) of the National Internal Revenue Code, as amended by E.O. 273, the pertinent portion of which provided: "SEC. 102. Value-Added tax on sale of services . (A) Rate and base of tax. There shall be levied, assessed and collected a value-added tax equivalent to 10% percent of gross receipts derived by any person engaged in the sale of services. The phrase "sale of services" means the performance of all kinds of services for others for a fee, remuneration or consideration including those performed or rendered by construction and service contractors; . . . : Provided, That the following services performed in the Philippines by VAT-registered persons shall be subject to 0%: "(1) . . . "(2) Services other than those mentioned in the preceding sub-paragraph, the consideration for which is paid for in acceptable foreign currency which is remitted inwardly to the Philippines and accounted for in accordance with the rules and regulations of the Central Bank of the Philippines." llcd This law was implemented by Section 8(c)(3) of Revenue Regulations No. 5-87, VAT Ruling No. 031-90 dated February 14, 1990 and VAT Ruling No. 098-90, dated May 2, 1990, as follows: "(3) Services performed in the Philippines other than those mentioned in subparagraph (1) above which are paid for by the person or entity to whom the service is rendered in acceptable foreign currency inwardly remitted and duly accounted for in accordance with Central Bank regulations. Where the contract involves payment in both foreign and local currency, only the service corresponding to that paid in foreign currency shall enjoy zero-rating. The portion paid for in local currency shall be subject to VAT at the rate of 10%." (Sec. 8(c)(3), Revenue Regulations 5-87). "The . . . service performed by a sub-contractor is not actually made for the foreign principal but for the main contractor. For these any remittances made by the foreign principal to the sub-contractor are payments for and in behalf of the main contractor who is the actual recipient of the foreign currency denominated payments; hence the sub-contractor is not qualified for zero-rating. It is the main contractor that is subject to 0% VAT on the entire proceeds of the contract, provided that the proceeds thereof, in foreign currency, had been inwardly remitted and accounted for in accordance with the rules and regulations of the Central Bank (Section 102(a)(2) of the Tax Code, as amended.)" (VAT Ruling No. 031-90 dated February 14, 1990). "This has reference to your letter dated March 2, 1990 which states that you entered into a contract with Kawasaki Steel Corporation (Kawasaki), a Japanese Corporation for the PNR Maintenance Depot Construction Project, to include both labor services and supplies of materials; that the project is funded under loan no. PH-P60 of the Overseas Economic Cooperation Fund (OECF) of Japan, and that pursuant to the contract agreement, (a) all contractor's valid billings for payment shall be divided into 15% in Philippine Peso and 85% in Japanese Yen and (b) any additional expense arising from VAT shall be borne by your company and included in the Kawasaki's billing to Philippine National Railways (PNR). "In reply, . . . you are still liable for the passed-on VAT for both currency portions of the contract price. . . ." (VAT Ruling No. 098-90, May 2, 1990) Following the rationale in the aforesaid implementing regulations and BIR ruling, it follows that the loan agreement between DOTC and the OECF for which the proceeds of loan in foreign currency was inwardly remitted to the Philippines is a separate and distinct transaction so far as the inward remittance of the foreign exchange is concerned. Since the payment under the contract of services between DOTC and AIC does not involve any inward remittance of foreign currency for the simple reason that the payor (DOTC) is a resident of the Philippines, it follows that the requisite provided by law and regulations for VAT zero rating of the said transaction is not met. Most importantly, the issue on whether the foreign currency portion of your said contract is taxable had already been resolved expressly under VAT Ruling No. 098-90 dated May 2, 1990, i.e. that both currency portions of the contract price shall be subject to the 10% VAT . B. Contract Period after December , 1995 The law applicable beginning January 1, 1996 is governed by Section 102(b)(2), NIRC, as amended by R.A. No. 7716 (now Section 108(B)(2), NIRC, as renumbered by R.A. 8424), the pertinent portion of which provides as follows: "SEC. 108(B)(2). Transactions Subject to Zero Percent (0%) Rate . "(2) Services other than those mentioned in the preceding paragraph the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP)." The said provision of law is implemented by Section 4.102-2(b)(2) of Revenue Regulations No. 5-96, as follows: "Services other than processing, manufacturing or repacking for other persons doing business outside the Philippines for goods which are subsequently exported as well as services by a resident to a non-resident foreign client such as project studies, information services, engineering and architectural designs and other similar services the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP." In view of the foregoing, the entire amount of the contract price (i.e. Philippine Peso portion plus Japanese Yen portion) of the said sale of services by AIC to the DOTC is subject to the 10% Value-Added Tax. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. prLL Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal & Enforcement Group