VAT Ruling No. 032-04

October 29, 2004 VAT RULING NO. 032-04 Sec. 27 (A), 108 VAT Ruling No. 051-01, 060-92 ITAD Ruling No. 009-03 Waagner-Biro Binder AG c/o Waagner-Biro Philippines, Inc. 19/F-A Trafalgar Plaza 105 H. V. de la Costa Street Salcedo Village, Makati City Attention: Mr. Helmut J. Wuzela President & CEO Gentlemen : This refers to your letters dated October 21, 2001, August 12, 2002, January 22, 2003, and January 21, 2004 requesting for tax relief concerning your contract with the Department of the Interior and Local Government (DILG). It is represented that Waagner-Biro Binder AG (Waagner, for short) is a corporation duly organized and existing under and by virtue of the laws of Austria; that on April 6, 1999 it entered into an agreement with the Government of the Republic of the Philippines, represented by the Department of the Interior and Local Government (DILG), for the design, fabrication, supply and other required services of approximately 12.025 in prefabricated steel truss Works implementing Phase II of the President's Bridge Program which are undertaken in Austria (the OFFSHORE Portion); that the performance of local services (the ONSHORE Portion) under the Contract was assigned by Waagner to Waagner-Biro Philippines, Inc. (WBPI), a corporation registered and existing under Philippine laws; that this Contract is funded under the Credit Agreement of the 23rd July 1999 between the Republic of the Philippines and the Bank of Austria AG in the amount of ATS 1,000,000,000. (Austrian Schilling One Billion); that the Contract defines the responsibility for the payment of taxes levied in the country of origin of the supplies and in the Philippines as follows: 1. All taxes, whether direct or indirect, duties, fees, stamps and other charges levied by the country of origin related to the execution of the Contract shall be borne by the Supplier (Waagner) and shall be included in the prices [Clause 19(1) of Annex II, Conditions of Contract], 2. All taxes, whether direct or indirect, customs and import duties, licenses, other charges levied by the authorities in the Philippines, as well as any local taxes and permits related to the execution of the Contract shall be borne and furnished by the Purchaser (DILG, herein [Clause 19(2)], 3. The Supplier reserves the right to assign local Services and Supplies to a duly registered local corporation to handle local content. . . . Any taxes, fees, and charges whatsoever nature levied in the Philippines on this Portion of the Contract assigned shall be borne by the Purchaser [Clause 24, Annex II (Conditions of Contract)], and 4. The funds made available by the Loan Agreement shall not be used to meet any taxes, fees, import or customs duties, imposed directly or indirectly by the Government of the Philippines [Clause 19(4) of Annex II (Contract Conditions). Based on the foregoing, you are requesting for a ruling that the VAT for the transactions on the implementation of the local content of the Contract is eligible for zero percent (0%) VAT rate and that the payments made by you for the input VAT on local purchases of supplies and services thereof are refundable by the government or otherwise entitled to tax credit certificates (TCC). In reply, please be informed that your request cannot be granted for lack of legal basis. Section 108 of the National Internal Revenue Code (NIRC) imposes a 10% value added tax on gross receipts derived from the sale of service rendered in the Philippines. Firstly, in ITAD Ruling No. 009-03 dated January 16, 2003, it was held that a non-resident foreign corporation which does not perform any service and is not considered to have carried business through a permanent establishment in the Philippines is not subject to income/withholding tax and VAT in the Philippines but the contractor, a Philippine corporation, which undertook the Onshore portion, is subject to Philippine internal revenue taxes. In the said ruling, Balfour-Cleveland Consortium (Consortium), a corporation organized under the laws of the United Kingdom, was awarded a contract by the Philippine Government through the Department of Public Works and Highways (DPWH) for the design, fabrication and supply of structural bridges with advisory services whereby the OFFSHORE portion consisting of the design and delivery of U.K. supplied steel bridges was performed by the Consortium and the ONSHORE portion consisting of advisory services was subcontracted to First Philippine Balfour Beatty (FPBB), a Philippine corporation. Considering that actual services were performed in the Philippines by FPBB, a domestic corporation, in the pursuit of the advisory portion of the contract, any income/profits it derived from the subcontracting agreement with the Consortium are subject to the 10% value added tax and ordinary corporate income tax pursuant to Sections 108 and 27(A) of the NIRC of 1997. Such being the case, the income/profits derived by WBPI from carrying on the ONSHORE portion of the instant contract between Waagner and the DILG are subject to the 10% VAT imposed under Section 108 of the Tax Code and to the income tax imposed under Section 27(A) of the same Code. Ergo , the payments made by WBPI for the input VAT on local purchases of supplies and services are not refundable by the government nor otherwise entitled to tax credit certificates (TCC). They may, however, be claimed as automatic credit against the 10% Output tax of WBPI. Further, under Section 28(4), Article VI of the 1987 Constitution of the Philippines, no law granting tax exemption shall be passed without the concurrence of a majority of all the members of Congress. In view of said provision, since there is no showing that the alleged Credit Agreement between the Republic of the Philippines and the Bank of Austria AG, owned by the Austrian Government, has been ratified by Congress, the tax exemption clause therein shall be considered without force and effect (VAT Ruling No. 060-92 dated May 6, 1992). Moreover, the herein Agreement between Waagner and the DILG is not an international agreement because it is not an agreement between the Republic of the Philippines and another State (VAT Review Committee Ruling No. 051-01 dated July 23, 2001). Hence, its stipulations shall only bind the parties, i.e., Waagner and the DILG. It has no force and effect of law. It cannot create any tax exemption privilege or benefit. That the DILG agreed to pay for the taxes due from WBPI in connection with its performance of the Onshore portion of the Project is not binding to the BIR. It does not make the DILG the person liable for the tax. At the most, DILG is only duty bound to reimburse the taxes for which WBPI is directly liable. AEHTIC If ever there is any relief available in the instant case, it may be the "automatic appropriation" for the tax liabilities of certain qualified government entities, which includes the national government agencies like the DILG, under the General Appropriations Act. However, this is not a tax exemption law and its implementation is within the jurisdiction of the Fiscal Incentives Review Board (FIRB) and the Department of Budget Management (DBM). This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group