VAT Ruling No. 058-03

December 15, 2003 VAT RULING NO. 058-03 RMC 42-99 VAT Ruling No. 024-2000 and DA-036-2000 Joaquin Cunanan & Co. PriceWaterhouseCoopers 29/F Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty. George J. Lavadia Principal, Tax Services Department Gentlemen : This refers to your letter dated March 2, 2000 requesting on behalf of your client, Tonets Co. Ltd. (Philippine Branch) [Tonets, for brevity], for a confirmation of you opinion that it is exempt from the 1% creditable withholding tax and the 8.5% creditable withholding VAT pursuant to Revenue Memorandum Circular (RMC) Nos. 32-99 and 42-99. It appears that MTOB Consortium was contracted by the Manila International Airport Authority (MIAA) to execute the Ninoy Aquino International Airport Terminal II Development Project; that Tokyu Construction Co. Ltd. (Tokyu), a Japanese firm, is the lead member of MTOB Consortium; that Tokyu subcontracted the services of Tonets, another Japanese firm; and that based on the Subcontract Agreement between Tokyu and Tonets, the latter ". . . has the necessary experience, capability, technology, manpower and financial resources required to undertake and complete the subcontracted works strictly in accordance with the plans, specifications, and all other pertinent documents agreed upon and signed by and between the OWNER (MIAA) and the CONTRACTOR (MTOB Consortium)". In reply, please be informed that under RMC No. 42-99 dated June 2, 1999, Overseas Economic Cooperation Fund of Japan (OECF) Funded Projects are covered by the standard clauses of the Exchange of Notes between the Japanese Government and the Republic of the Philippines, pertinent portion of which states: "The government of the Republic of the Philippines will exempt the Fund from all fiscal levies or taxes imposed in the Republic of the Philippines on and/or in connection with the Project Loan, the Engineering Service Package Loan and the Commodity Loan as well as interest accruing therefrom." "The Government of the Republic of the Philippines will, itself or through its executing agencies or instrumentalities, assume all fiscal levies or taxes imposed in the Republic of the Philippines on Japanese firms and nationals operating as suppliers, contractors or consultants on and/or in connection with any income that may accrue from the supply of products and/or services to be provided under the Project Loan." RMC No. 42-99 established that under the first clause as above-stated, it is the intention of the two governments not to use the proceeds of the loan in the payment of all fiscal levies or taxes imposed by the Philippines. In view thereof, this Office held that the executing government agencies should not impose the 8.5% creditable withholding VAT prescribed under Section 114(C) of the Tax Code of 1997, for government public works contractors undertaking OECF Funded Projects. Otherwise, the agreement not to subject the funded amount to taxes, which is the clear intent of both the Philippine and the Japanese Governments under the Exchange of Notes, will be negated. The fact that the agreement between MIAA and MTOB Consortium provides that "The CONTRACTOR's taxes, licenses, permits, and fees which may be due the local and/or national government on account of the performance and completion of the work stipulated herein . . . shall be paid for and obtained by the Contractor on its own account . . . " will not invalidate the tax-free treatment of the fund. The Exchange of Notes clearly enunciates that Japanese contractors or nationals engaged in OECF Funded Projects in the Philippines shall not be required to pay any fiscal levy or tax associated with the project. Moreover, by virtue of the aforestated second clause of the Exchange of Notes, the Philippine Government, or its agencies or instrumentalities, has bound itself to assume all fiscal levies or taxes in the Philippines on Japanese firms and nationals operating as suppliers, contractors, or consultants on and/or in connection with any income accruing from products and/or services provided under the Project Loan. IcDHaT Inasmuch as the pertinent provisions of the contract between MIAA and the MTOB Consortium are deemed adopted by the subcontract between Tokyu and Tonets, and, further, that both contracts must conform with the standard clauses of the Exchange of Notes between the Japanese Government and the Republic of the Philippines for OECF Funded Projects, Tonets should not be subject to the creditable withholding tax of 2% on its income from its subcontract with Tokyu. Hence, this Office is of the opinion, and so holds that the 8.5% withholding VAT should not be imposed on any payments made to Tonets in connection with the above project. Furthermore, any income tax pertaining to the project and accruing to Tonets shall be assumed by MIAA, Tonets being a Japanese corporation doing an OECF Funded Project, thereby entitling it to the coverage of the above-cited agreement. (BIR Ruling No. DA-036-2000 dated January 18, 2000 and VAT Ruling No. 024-2000 dated July 27, 2000) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group