VAT Ruling No. 080-01

November 20, 2001 VAT RULING NO. 080-01 RMC 32-99 & 42-99 000-00 Philippine Constructors Association, Inc. 3rd Floor, Padilla Building Emerald Avenue, Ortigas Center Pasig City Attention: Mr. Isidro A. Consunji President Gentlemen : This refers to your letter dated August 3, 2000 seeking clarification of VAT Review Committee Ruling dated December 6, 1999 signed by former Commissioner Beethoven L. Rualo regarding the interpretation and implementation of Revenue Memorandum Circular Nos. 32-99 and 42-99. It is stated that while in the said ruling, the former Commissioner confirms and so holds that the condition on the non-utilization of the OECF loan in payment of local taxes likewise applies to Filipino contractor undertaking an OECF-funded project such that the concerned government agency should likewise observe the non-imposition of the 8.5% VAT withholding from the invoice of Filipino contractors, or other nationals, the penultimate paragraph therein allegedly obscures or negates the otherwise clear ruling when it said: " This is not to say that by the same token, Filipino contractors should likewise be exempt from withholding tax, income tax or the regular VAT when undertaking OECF-funded projects. They remain subject to these taxes inasmuch as the tax assumption clause provided for under the Exchange of Notes operates only in favor of Japanese contractors or nationals as a special concession for the grant of the loan." We regret the misunderstanding which could have been avoided had there been a prior discussion of the underlying concepts behind the Exchange of Note for the OECF program. Under the OECF (now JBIC) program, the Japanese government undertakes to provide soft loans for identified Philippine development projects. The recently concluded 23 rd Yen Loan Package is one such program under which the Japanese government agreed to extend Y 135 Billion in loan package to the Philippines, payable in 30-40 years, and at a token interest rate averaging less than 1% per annum. As a concession for this and other previous agreements, the Philippine government agreed to allow Japanese contractors or nationals to participate in the execution of the approved projects under certain tax privileges, following two underlying principles governing JBIC-funded projects, namely: 1. Non-Utilization of the Loan for Local Taxes Disbursements under the loan shall be exclusively used for the approved projects and shall not be used for, nor diminished by, taxes, duties and other fiscal charges. This is the principle applicable to Filipino contractors/non-Japanese contractors as discussed below. 2. Tax Assumption Scheme . All direct taxes otherwise due from Japanese contractors and nationals shall be assumed by the executing government agency and/or project beneficiary. This is the provision applicable only to Japanese contractors as further explained below. In discussing the " non-tax utilization " aspect of the loan, the previous ruling held that this principle is applicable not only to Japanese contractors but also to Filipino contractors, or other nationals (non-Japanese) performing OECF (JBIC)-Funded Projects since that condition is "not dependent upon the nationality of the project contractor". Since this principle was used to justify the non-imposition of the 8.5% VAT withholding by the executing government agency from the invoice billing of the Japanese contractors, then it stands to reason that if the Filipino contractors or other non-Japanese contractors were to engage in such projects, they should likewise be exempt from the 8.5% VAT withholding precisely because the " non-utilization of the loan in the payment of taxes" is not dependent upon the nationality of the project contractor. Thus, the rule now is that no 8.5% VAT withholding will be imposed on JBIC-funded projects, irrespective of the nationality of the contractor. However, it should be clarified that notwithstanding the non-imposition of the advance VAT withholding, both Japanese and Filipino (or non-Japanese) contractors engaged in JBIC-funded projects remain subject to the normal 10% VAT by way of output tax. It so happens that it is only the advance 8.5% VAT withholding that is connected with the non-tax utilization aspect of the loan. The withholding tax, income tax or the regular 10% output VAT are the object of the " tax assumption scheme " which operates only in favor of the Japanese contractors or nationals under the Exchange of Note. To clarify this point, the ruling with the questioned paragraph, proceeded in saying that " Filipino contractors (are not) exempt from withholding tax, income tax or the regular VAT when undertaking OECF-funded projects. They remain subject to these taxes inasmuch as the tax assumption clause provided for under the Exchange of Notes operates only in favor of Japanese contractors or nationals as a special concession for the grant of the loan ". It is your contention, however, that the above privileges or special tax treatment should be applied uniformly to all contractors irrespective of nationality since, otherwise, there will be unfair competition. Even if we agree with your contention, this Office would not be the proper venue for matters directed at the wisdom of an agreement entered into by our government. In this case, we are merely implementing and cannot deviate from the tenor of the Exchange of Note for OECF or JBIC -funded projects, the same being an international agreement and considered part of the law of the land. As it is, only Japanese contractors and nationals enjoy the benefit of tax assumption for JBIC projects. We trust that we have clarified matters. Very truly yours, (SGD.) RENE G. BAEZ Commissioner of Internal Revenue