VAT Ruling No. 041-03

September 26, 2003 VAT RULING NO. 041-03 RMC 42-99 VAT Ruling No. 106-99, 092-02 Toyo Construction Co., Ltd. Philippine Branch 4th Floor, Princess Building 104 Esteban St. Legaspi Village Makati City Attention: Mr. Takuro Inoue General Manager Gentlemen : This refers to your letter dated September 17, 2003 requesting an urgent confirmation that the invoice billing of your company, as a Japanese contractor doing JBIC-funded project, is exempt from the deduction of 8.5% creditable VAT withholding and 2.0% creditable expanded withholding tax. It is represented that Toyo Construction Co., Ltd. (Toyo) has entered into a contract with Cebu City Government (CCG) for the construction of Cebu South Reclamation Project (the "Project") funded by Japan Bank for International Cooperation (JBIC) under Loan Agreement No. PH-P157; that the total contract price is P2,494,000,000.00 (finally P2,452,0323,594.67 after final Change Order No. 3) to be paid in the following currencies: P2,116,000,000.00 (84.84%) in Japanese Yen and P378,000,000.00 (15.16%) in Philippine Peso; that the Project has been completed in October 2000 but the balance of your billing for Peso portion of P151,779,074.90 has remained unpaid for more than two (2) years; that finally through arduous negotiation for more than one (1) year, an agreement was reached in November 2002 wherein the CCG agreed to pay the said balance in three (3) installments; that the first installment of P50,000,000.00 was made in January 2003, without any VAT withholding, which is in accordance with your Revenue Memorandum Circular (RMC) 42-99; that the second installment is due this month, however the Cebu City Government now insist to deduct 8.5% creditable VAT withholding and 2% withholding tax, or a total tax deduction of 10.5%, hence this request for ruling. In reply, please be advised that, as established by RMC 42-99, by the Records of Discussions under the Exchange of Notes between the Philippine Government and the Government of Japan concerning Yen Loan Projects, and by numerous rulings of this Office, the invoice billings of Japanese contractors engaged in JBIC-funded projects are exempt from the 8.5% creditable VAT withholding and from the 1% (now 2%) creditable withholding tax. ( VAT Ruling Nos. 106-99 dated Nov. 5, 1999; 110-99 dated Dec. 2, 1999; 012-00 dated March 7, 2000; 021-00 dated June 9, 2000; 024-00 dated July 27, 2000; 023-02 dated April 18, 2002; 092-02 date Dec. 23, 2002 ). Said tax treatments and rulings have not been modified nor reversed and continue to be the prevailing rules insofar as JBIC-funded projects are concerned. Accordingly, the balance of your billing for Peso portion in the total amount of P151,779,074.90 remains exempt from the aggregated withholding tax rate of 10.5%. It is understood, however, that your total gross receipts for this project, although exempt from the creditable VAT withholding, shall remain subject to the regular 10% VAT less credits for legitimate input taxes. TaCSAD This will, therefore, serve as a notice to the Cebu City Government 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 ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group