VAT Ruling No. 077-01

October 29, 2001 VAT RULING NO. 077-01 Section 108 VAT 183-90 VAT 125-88 Department of Public Works & Highways Port Area, Manila Attention: Office of the Secretary Gentlemen : This refers to the letter of then Secretary Gregorio R. Vigilar dated August 18, 2000 seeking clarification on the effective value-added tax (VAT) to be incorporated in the preparation of project cost estimates and whether cost items such as Contractors All Risk Insurance, OCM and Profit which are used by DPWH in the preparation of agency Estimates for DPWH projects shall likewise be subject to VAT. In your letter, you stated that a typical example of a Detailed Price Analysis currently used by DPWH in the preparation of its Approved Agency Estimate for DPWH projects is as follows: Donsung Construction Company Ltd. Detailed Price Analysis Project: Rural Road Network Development Project Contract Package 1 Particulars Total Cost A) Equipment P37,791.00 B) Labor 5,700.00 C) Materials -0- D) Total Direct Cost (A+B+C) P43,491.00 E) VAT (10% of A & B) 4,349.10 F) Contractors All Risk Insurance (2% of D) 869.82 G) O.C.M. (12% of D) 5,218.92 H) Profit (10% of D) 4,349.10 Total Cost P58,277.94 ========== Further, you stated that the DPWH Approved Agency Estimated as shown in the above example provides 10% VAT for Items A (Equipment) and B ((Direct Labor) only since this was based on VAT Ruling 105-88 dated May 4, 1988 which ruled that the effective VAT to be incorporated in the contract price is 10% of the labor and equipment supplied by non-VAT entities (material cost not included). However, in a joint meeting held last July 20, 2000 with the representatives of the BIR, Philippine Contractors Association (PCA), DPWH, DOTC and DOF pertaining to the tax related provisions of the 23 rd Yen Loan Agreement, you were informed by the BIR representative that the VAT to be applied should not only be for labor and equipment but for other cost items as well, such as Contractors All Risk Insurance, O.C.M., and Profit. Thus, this request for clarification. In reply, please be informed that pursuant to Section 108 of the Tax Code of 1997, it is provided that " There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipt derived from the sale or exchange of services, including the use or lease of properties. The term "gross receipts " means "the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding the value added tax". Moreover, with the effectivity of Republic Act No. 7716, as amended by Republic Act No. 8241, and as further amended by Republic Act No. 8424, the option to bill the tax as a separate item in the invoice has been repealed. This means that in determining the output tax assuming a total contract cost including VAT is P58,277.94, the output tax is P5,297.99 (P58,277.94 x 1/11) and not the amount P4,349.10 which was the amount of VAT erroneously factored in your computation of the Approved Agency Estimate as shown in the above illustration. It is clear from the abovementioned definition that VAT is not only imposed on direct labor and equipment as what has been done in your submitted contract cost estimate but rather VAT is imposed on all cost items considered in arriving at the Approved Agency Estimate for DPWH Project. This necessarily includes not only labor and equipment but also materials (whether these are bought from VAT-or non-VAT registered suppliers) and other cost items such as Contractors All Risk Insurance, O.C.M., Profit and such other items considered in arriving at the Estimate Contract Price of a particular DPWH construction project. Accordingly, the correct computation of the VAT in line with the preparation of the "Approved Agency Cost Estimate", supposing additional cost for materials of P5,000 is imputed, shall be as follows: Donsung Construction Company Ltd. Detailed Price Analysis Project: Rural Road Network Development Project Contract Package 1 Particulars Total Cost A) Equipment P37,791.00 B) Labor 5,700.00 C) Materials 5,000.00 D) Total Direct Cost (A+B+C) P48,491.00 E) Contractors All Risk (2% of D) 969.82 F) O.C.M. (12% of D) 5,818.92 G) Profit (10% of D) 4,349.10 H) Total Cost Estimate (D+E+F+G) P60,128.84 I) Add: VAT (10% of H) 6,012.88 J) Total Contract Cost Estimate (H+I) P66,141.72 ========== Please be informed further, that for infrastructure projects implemented by your Agency, you are required to withhold creditable value-added tax from the gross payments made to your contractors at the rate of 8.5% pursuant to Section 114(C) of the Tax Code of 1997. However, excepted from the 8.5% VAT withholding are projects funded by JBIC (formerly OECF) pursuant to RMC 42-99. This Ruling is being issued on the basis of the foregoing facts as represented. 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.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group