VAT Ruling No. 033-03

July 7, 2003 VAT RULING NO. 033-03 Sec. 4.100-2 (c) BIR Ruling No. 093-95, 046-95, DA-187-93 Subic Bay Metropolitan Authority Office of the Chairman & Administrator SBMA Center, Waterfront Road Subic Bay Freeport Zone Attention: Mr. Felicito C. Payumo Chairman & Administrator Dear Sir : This refers to your letter dated March 26, 2003 stating specific tax concerns in relation to the SBMA's, Subic Bay Port Development Project, an infrastructure project financed by the Japan Bank for International Cooperation. It is represented that under the JBIC-funded Port Development Project, the Japanese contractors are supposed to secure value added tax (VAT) zero-rating status so that the VAT will not be passed on to the SBMA; that SBMA believes that securing exemption from passing on the VAT to SBMA would not solve the problem since the refund mechanism of the BIR is not readily obtainable and the conduct of an audit is a pre-requisite to the refund; that JBIC foresees that this (refund mechanism) will take a substantial amount of time and inasmuch as this is a project with huge contract costs, the amount of tax will correspondingly be staggering; that in such a case both the contractor and SBMA may incur cash flow problems, to the detriment of the Subic Bay Port Development Project, as well as the national interest; that the additional burden in assuming the tax by SBMA is not acceptable as it already has to provide for payment of guarantee fees, principal loan repayments, interests, and counterpart funds. In essence, the SBMA would like this Office to confirm that a) the VAT and income taxes cannot be imposed on the SBMA, in the light of Republic Act No. 7227; and, b) that in relation to such exemption from taxes, the Japanese contractors and sub-contractors for the Subic Bay Port Development Project should no longer be made subject to the VAT zero-rating scheme and subsequent refund mechanism but just be exempted outright from VAT and income taxes. In reply, please be advised that the above suggested treatment is not tenable. With respect to VAT and in relation to the Exchange of Notes, the established general rule is that both the Japanese contractors and the concerned executing government agency are subject to 10% VAT in the implementation of projects funded by Yen Loan, such as the present Subic Bay Port Development Project [ Revenue Memorandum Circular (RMC) No. 42-99 ]. But following the territorial tax privileges within the Subic Bay Freeport Zone, transactions by VAT-registered sellers to the SBMA-registered enterprises would be entitled to the benefit of 0% VAT instead of the normal 10% VAT rate. This is referred to as the effective zero-rating scheme authorized under Section 4.100-2(c), of Revenue Regulations (RR) No. 7-95 (Consolidated Value-added Tax Regulations), viz : "(c) Sales to persons or entities whose exemption under the special laws, e.g., RA No. 7227, duly registered and accredited enterprises with Subic Bay Metropolitan Authority (SBMA) and Clark Development Authority (CDA), R.A. 7916, Philippine Economic Zone Authority (PEZA), or international agreements, e.g., Asian Development Bank (ADB), International Rice Research Institute (IRRI), etc., to which the Philippines is a signatory effectively subject such sales to zero-rate." In BIR Ruling UN-107-3-28-94 dated March 15, 1994, which was issued at the instance of the SBMA itself, this Office held, among others, that a) SBMA falls within the scope of business enterprises operating within the Zone . b) Its importation of goods/articles in connection with such activities, which are proprietary in character, shall be exempted from VAT. c) The sale of goods by a domestic vendor in the customs territory to SBMA shall be considered export and effectively zero-rated on the part of the seller. The domestic vendor shall not impute or shift any VAT as part of cost to be paid by the SBMA on its purchases from the Customs Territory . (Emphasis supplied). The same treatment is applicable to your present Subic Bay Port Development Project. Thus, the sale of goods by a domestic vendor in the customs territory to SBMA shall be considered export and effectively zero rated on the part of the seller. The domestic vendor shall not impute or shift any VAT as part of cost to be paid by the SBMA on its purchases from the Customs Territory. ( BIR Ruling No. 093-95 dated June 15, 1995; BIR Ruling No. 046-95 dated March 3, 1995; BIR Ruling DA-187-98 dated May 12, 1998 ). Consequently, the sales of goods and services by your Japanese contractors are entitled to effectively zero-rated VAT. Essentially, the winning contractor shall not pass on VAT to SBMA by virtue of its zero-rated sale. In turn, the winning contractor shall be entitled to the issuance of a tax credit certificate (TCC) or cash refund or creditable input tax due or paid attributable to such zero-rated sale, pursuant to Section 4.100-2 of RR No. 7-95: "A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations." TcCSIa However, please note that, the privilege of effective VAT zero-rating can be invoked only by the Japanese contractors transacting direct business with SBMA, and not by sub-contractors and other third party suppliers dealing not directly with SBMA but with the Japanese main contractor since, other than exempt and zero-rated sales, all transactions between VAT-registered taxpayers are subject to the regular 10% VAT. With respect to income tax, it is noted that the exemption of SBMA from the regular corporate income tax is confirmed by no less than the Secretary of Finance in DOF Ruling dated November 13, 2001 which reversed the earlier BIR Ruling DA 036-99 holding otherwise. Hence, under normal circumstances , SBMA is subject to the 5% preferential tax rate in lieu of local and national taxes, pursuant to Sec. 12(c) of R.A. No. 7227, otherwise known as the Bases Conversion Act of 1992. However, since SBMA is the government agency-beneficiary of a JBIC-funded project and obviously a party to the Loan Agreement for the Subic Bay Port Development Project authorized by the Exchange of Notes, SBMA is directly bound by the terms thereof, which include the provision for the assumption of income taxes to be incurred by concerned Japanese contractors. The term "executing agency" refers to the project owner or the government agency, instrumentality or corporation beneficiary of the project and this fact is clearly established in the said Exchange of Notes. As in all past and current JBIC-funded projects, it is always the concerned "executing agency" that accounts for the tax burden and this remains the only effective manner of implementing the tax assumption scheme under the Exchange of Notes. In fine, for the income tax associated with the project, SBMA, the executing government agency, is mandated to assume the payment thereof under the Exchange of Notes. Correspondingly, the Japanese firms or nationals need not pay the taxes due on the income that may accrue from the supply of products and/or services to be provided under the Project Loan but they will still have to file the corresponding income tax returns. Moreover, with respect to the creditable withholding tax, SBMA shall assume the payment thereof out of its own funds and remit the same to the BIR pursuant to RMC No. 42-99. Further, the Japanese contractors shall be constituted as withholding agents, with respect to their payments made in connection with their trade or business. These income payments include, among others, rental fees, management and professional fees, payment of royalties, as well as payment made to certain contractors pursuant to RR No. 2-98, as amended by RR No. 17-2003. The Japanese contractors as payors are the party liable for the payment of the taxes withheld. It must be stressed that the final or creditable/expanded withholding tax is not a tax on the Japanese contractors but rather a tax imposed on the payee that will be collected by the Japanese contractors, who are under obligation to remit the same. This is so because withholding tax is not a tax but is only a procedure by which the government collects the tax. In the case of the Commissioner of Internal Revenue vs. Malayan Insurance Co., Inc., G.R. No. L-21913, November 18, 1967, it was ruled that the withholding agent is personally liable for the payment of the withholding tax. The responsibility for the collection of the tax as well as the payment thereof is concentrated upon the person over whom the Government has jurisdiction. Thus, the withholding agent is constituted as the agent of the government and the taxpayer. With respect to the collection and/or withholding of the tax, he is the government's agent. In regard to the filing of the necessary income tax return and the payment of the tax, he is the agent of the taxpayer ( Philippine Guaranty Co. vs. CIR, 13 SCRA 775 ). This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, it will be established that the facts are different, then this ruling shall be deemed null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group