VAT Ruling No. 063-98

December 29, 1998 VAT RULING NO. 063-98 114 (C)-000-00-063-98 G. G. Reyes Construction, Inc. Room 2-D Doa Anita Bldg. E. Rodriguez Sr. Avenue Quezon City Attention: Mr . Genaro G . Reyes President Gentlemen : This refers to your letter dated June 16, 1998 stating that on March 1, 1991, G.G. Reyes Construction, Inc. (GGRCI) had entered into a contract with the Department of Public Works and Highways (DPWH) for the construction of the Lower Agusan Development Project, Stage 1, Phase 1, Butuan City (LADP Contract) for a contract price of P445,852,180.88; that as regards the payment of VAT, GGRCI and DPWH agreed in the LADP Contract that "WHEREAS, in addition to the said loan Y2,521,195,307 or P423,559,571.84, the Employer (DPWH) shall provide the amount of Peso Twenty-Two Million Two Hundred and Ninety-Two Thousand Six Hundred Nine and Centavos Four Only (P22,292,609.04) to defray the cost of Value-Added Tax), which is equivalent to five percent (5%) of the total contract price." that since the time the LADP Contract was implemented, DPWH has been withholding the 5% VAT (or 50% of the 10%) from GGRCI's progress billings; that, however, starting January 1, 1997, the effective date of R.A. No. 8241, which amended R.A. 7716, otherwise known as the "Expanded Value-Added Tax Law", DPWH started withholding a total of eight and one half percent (8.5%) or an additional three and one half percent (3.5%) from the original five percent (5%) withholding VAT; and that on February 13, 1998, GGRCI wrote a letter to DPWH demanding for a refund of the 3.5% creditable VAT invoking the non-impairment of contract clause of the Bill or Rights. In connection therewith, you are requesting opinion as to the withholding rate of creditable VAT which DPWH should deduct from your progress billings relative to the LADP Contract. In reply thereto, please be informed as follows: Pursuant to Section 108 of the Tax Code of 1997 (then Section 102 of the Tax Code of 1977), there shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. Accordingly, the aforementioned construction contract (LADP Contract) shall be subject to the ten percent (10%) VAT; Under Section 110 of the Tax Code of 1977, as amended by RA 7716, otherwise known as the Expanded Value-Added Tax Law, the government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled corporations (GOCCs), shall, before making payment on account of its purchase of goods from sellers and services rendered by contractors which are subject to the value-added tax imposed in then Sections 100 and 102 of the Tax Code, deduct and withhold the value-added tax due at the rate of three percent (3%) of the gross payment for the purchase of goods and six percent (6%) on gross receipts for services, rendered by contractors on every sale or installment payment which shall be creditable against the value-added tax liability of the seller or contractor. dctai However, Section 100(c) of the Tax Code of 1977, as amended by RA 7716, was further amended by RA 8241, effective January 1, 1997 and which is now Section 114(C) of the Tax Code of 1997, which added a provision that in the case of government public works contractors, the withholding rate shall be eight and one half percent (8.5%). Paragraph 3, Page 3 of the "WHEREAS" portion of the LADP Contract specifically provides as follows: "WHEREAS, in addition to the said loan, the Employer (DPWH) shall provide the amount of Pesos Twenty-Two Million Two Hundred and Nine-Two Thousand Six Hundred Nine and Centavos Four Only (P22 , 292 , 609 . 04) to defray the cost of value-added tax (VAT) , which is equivalent to five percent (5%) of the total contract price ". (Emphasis supplied) It is clear from the aforequoted provision of the LADP contract that of the ten percent (10%) VAT to which the contractor, GGRCI, is liable under Section 108 of the Tax Code of 1997 (then Section 102 of the Tax Code of 1977), five percent (5%) thereof shall be assumed by DPWH and the other five percent (5%) thereof shall be paid by the contractor, GGRCI. Such being the case, even before the amendment of Section 110(c) of Tax Code of 1977 by RA 8241, effective January 1, 1997, when the withholding rate of creditable VAT for services rendered by contractors, including public works contractors, is six percent (6%) on gross receipts on every sale or installment payment, GGRCI is subject to a five percent (5%) withholding rate of creditable VAT because the one percent (1%) is assumed by DPWH. When Section 110(c) of the Tax Code of 1977 was amended by RA 8241 and which is now Section 114(C) of the Tax Code of 1997 which made the withholding rate of creditable VAT for public works contractors to eight and one half percent (8.5%), GGRCI is still liable to pay only five percent (5%) thereof because the three and one half percent (3.5%) is assumed by DPWH. Such being the case, this Office is of the opinion as it hereby holds that GGRCI is liable only to a five percent (5%) withholding rate of creditable VAT on its gross billing to DPWH with the three and one half percent (3.5%) being assumed by DPWH or a total of eight and one half percent (8.5%) creditable VAT pursuant to Section 114(C) of the Tax Code of 1997. LLjur This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue