VAT Ruling No. 053-98

December 2, 1998 VAT RULING NO. 053-98 098-90-053-98 Toyo Construction Company Ltd. Philippine Branch 4th Floor, Princess Building 104 Esteban Street Legaspi Village, Makati City Attention: Mr . Takuro Inoue Treasurer Gentlemen : This refers to your letter dated May 04, 1998 requesting our opinion on certain issues raised regarding Value Added Tax (VAT), particularly the withholding of VAT on payments made by the Department of Public Works and Highways (DPWH) to the Toyo/Evara Joint Venture for construction projects essentially funded from the yen credit package of the Overseas Economic Cooperation Fund (OECF). dctai It is represented that in August of 1993, Toyo/Evara Joint Venture (Joint Venture), a joint venture duly organized and existing under the laws of Japan and the Philippines and duly licensed by the Philippine Contractors' Accreditation Board (PCAB) was awarded by DPWH, after public bidding, the contract for the Metro Manila Flood Control Project II (Package A) namely, the: (1) Construction of Vitas and Balut Pumping Station and Drainage Main/Sub-Main; (2) Improvement of Esteros; and (3) Supply and Installation of Plant and Power Supply System; that the final contract cost of the aforementioned project after the time extensions and change orders has increased to P1.756 Billion with output tax of P175.600 Million, amounting to a total of P1.932 Billion in contrast with the initial cost of P1.250 Billion with output tax of P125.046 Million as indicated in the deed executed by the parties referred to as "Contract Agreement". Said contract cost is denominated partly in yen currency and partly in local currency. In order to fully settle the VAT liability of the Joint Venture, your company has requested the Honorable Secretary of DPWH to allow the Joint Venture to claim for the additional VAT not provided for in the Contract, which was then recommended for approval by the DPWH Director for Legal Services, Cesar D. Mejia. Furthermore, you also stated in your letter that the input taxes incurred by the Joint Venture for its payments to suppliers on said project already amounts to P103.000 Million as of February 1998 and is expected to reach P110.000 Million when the project is finally completed. Nevertheless, for the payments to be made by DPWH to the Joint Venture, an amount corresponding to the withholding tax on value-added tax is deducted. In view of the above, the following issues are raised: (1) Whether or not it is proper for the DPWH to deduct VAT withholding on the payments made to the Joint Venture on construction projects carried out pursuant to a Contract of Agreement entered by and between the Joint Venture and the Government of the Philippines for projects essentially funded by the OECF? It is your company's position that no withholding tax on VAT should be imposed on such payments as this contradicts the contractual commitment of the government to assume tax liabilities of the Joint Venture for the project which has been explicitly provided for under Clause 73.2 of the Contract Agreement and Articles 4.1 and 4.2 of the Exchange of Notes dated December 16, 1987 which in brief exempts the fund from all fiscal levies and taxes and for which the Government shall assume all the fiscal levies and taxes on Japanese firms and nationals operating as suppliers, contractors or consultants in connection with any income that may accrue from the supply of products/services to be provided under the Project Loan and Engineering Service Package Loan. In the light of the foregoing, the payment of VAT made by DPWH to the Joint Venture is viewed by your company as a reimbursement of the VAT incurred by the same for the purchases of goods and services from various suppliers with respect to the implementation of the said foreign-funded assisted project and therefore, not subject to withholding tax. (2) In any event that a withholding tax on VAT is imposed, what rate of tax should be imposed on the payments made to Joint Venture in 1998? Should the tax rate be imposed at 8.5% or 6% on the expected receivables of P1.083 Billion? From the start of the project up to December 1997, the Joint Venture had received from DPWH a total of P847,785,897.19. Expected receivables in 1998 from DPWH is P1,083,814,102.69 due to change orders. The payment received from DPWH up to December 1997, as asserted, did not include the VAT portion. The total VAT amounting to P175.600 Million shall be billed to DPWH in 1998, forming part of the estimated receivables of P1.083 Billion, hence, closing the final contract cost of P1.931 Billion. In reply thereto, please be informed of the following: (1) That, the issue on whether or not it is proper to impose VAT on payments made to contractors of projects funded by the OECF has long been settled in a VAT ruling issued by this Office in May 1990 (VAT Ruling No. 098-90) whereby it was ruled that VAT shall be imposed on the whole amount of the contract cost of said project and that the 1% creditable withholding on income tax shall be imposed on the whole amount, net of VAT by the executing agency or instrumentality of the Government. LexLib This Office finds your claim that the imposition of withholding tax on VAT as required by Sec. 4.110-3 of Rev. Regs. No. 7-95, as amended by Sec. 9 of Rev. Regs. No. 6-97 and further amended by Sec. 4.114(a) of Rev. Regs. No. 2-98, contradicts the contractual commitment of the government to assume the tax liabilities of the Joint Venture as embodied in the Contract Agreement and Exchange of Notes, unmeritorious on the ground that the Contract Agreement included the VAT portion of the contract cost to be paid by the DPWH to the Joint Venture. The fact that such is embodied in the Contract and the same is billed by the Joint Venture to DPWH, clearly shows that the Government, through its implementing agency the DPWH, is the one assuming the tax liabilities of the Joint Venture. Thus, DPWH is required to deduct from the payments made by it to the Joint Venture beginning January 1, 1998, an amount equivalent to 8.5% creditable withholding VAT, which tax shall be remitted to the Bureau not later than the 10th day following the month when the withholding was made except taxes withheld for the 3rd month of the quarter which shall be through a Quarterly Value-Added Tax Return filed not later than 25th day after the end of the calendar quarter, as provided under Sec. 4.114(A) and (C) of Rev. Regs. No. 2-98. dctai (2) That, the rate of withholding tax on VAT to be imposed on the 1998 estimated receivables, as discussed in the preceding paragraph, shall be 8.5% required under Rev. Regs. No. 2-98 for public work contractors, which amounts to P83,749,271.57 (P1,083,814,102.69 x 10/11 x 8.5%). For the payments made during prior years 1996 and 1997, the Joint Venture is required to declare in its monthly and quarterly VAT returns for said prior periods, collections received therefrom as transactions subject to VAT with output tax amounting to P77,071,445.19 (P847,785,897.19 x 1/11). For your information and guidance. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue