VAT Ruling No. 033-04

October 29, 2004 VAT RULING NO. 033-04 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 letter dated July 31, 2003 requesting for tax relief concerning your contract with the Department of Public Works and Highways (DPWH). 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 August 20, 2001 it entered into an agreement with the Government of the Republic of the Philippines, represented by the DPWH, for the design, fabrication, supply and other required services for Steel Truss Bridging Material in connection with the Austrian Assisted Bridge Construction/Replacement Project of the DPWH; that the design and fabrication of the bridging materials are undertaken in Austria (the OFFSHORE Portion) while 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 28th February 2002 between the Republic of the Philippines and the Bank of Austria AG in the amount of ATS 500,000,000. (Austrian Schilling Five Million); 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 other than the Republic of the Philippines related to the execution of the Contract shall be borne by the Supplier (Waagner) and shall be included in the contract sum [Clause 19(1) of Annex II, Conditions of Contract], 2. All Philippine (national or local) taxes, whether direct or indirect, including VAT, customs and related VAT, and all other charges and fees related to the execution of the Contract shall be borne and furnished by the Purchaser (DPWH, herein) [Clause 19(2)], 3. The Supplier reserves the right to assign local Services and Supplies to a subsidiary or Branch Office to handle local content. . . . All Philippine (national or local) taxes, whether direct or indirect, including VAT, customs duties and related VAT, and all other charges and fees on this Portion of the Contract shall be borne and paid directly by the Purchaser [Clause 24, Annex I (Conditions of Contract)], and 4. The funds made available by the Credit Agreement shall not be used to meet any Philippine (national or local) taxes, whether direct or indirect, including VAT, customs duties and related VAT, and all other charges and fees related to the execution of the Contract [Clause 19(4)]. 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 WBPI for the input VAT on local purchases 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 in connection with the design, supply and fabrication of steel bridges which were undertaken outside the Philippines (the Offshore portion) 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, the 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 DPWH 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 certificate's (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 DPWH could not even be considered 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 DPWH. It has no force and effect of law. It cannot create any tax exemption privilege or benefit. That the DPWH agreed to pay for the taxes due from WBPI in connection with the latter's performance of the Onshore portion of the Project is not binding to the BIR. It does not make the DPWH the person liable for the tax. At the most, DPWH is only duty bound to reimburse the taxes for which WBPI is directly liable. SIEHcA Finally, 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 DPWH, 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 A. BUAG Deputy Commissioner Legal & Inspection Group