VAT Ruling No. 082-01

December 5, 2001 VAT RULING NO. 082-01 Sec. 108 (A) VAT 077-01 Commission on Audit Commonwealth Avenue, Quezon City Attention: Atty. Santos M. Alquizalas General Counsel Gentlemen : This refers to your letter dated October 9, 2001 seeking clarification on the proper basis for computing value-added tax for government contracts. It is represented that the Commission on Audit (COA) computes VAT at 10% of labor and equipment costs in reviewing Approved Agency Estimates (AAEs)/COA Estimates costs on government contracts pursuant to DPWH Order No. 30, series of 1991 which provides, thus: " For work items involving use of materials, only labor and equipment cost components of the estimated direct cost (EDC) are subjected to 10% VAT. The materials component is not subjected anymore to VAT because these were already 'taxed' by the supplier. The tax added by the supplier to the cost of these materials is part of the total cost paid by the contractor. This is an INPUT tax which is deductive from his OUTPUT tax. " On this basis of the aforesaid order, a team of auditors from the Special Audit Division of your Office has disallowed the amount of P3,303,048.20 expended in the renovation of the Baguio City Hall Building allegedly representing an erroneous computation of VAT in the contractor's bid price. The team opined that the VAT used should have been 10% to be applied only on the labor and equipment cost components of the contractor's bid price and not on the total contract cost which includes materials. The City Mayor of Baguio and the City Planning and Development Coordinator appealed the subject disallowance contending since VAT is an indirect tax, the amount of tax may be shifted to the buyer, transferee or lessees of goods or purchases or services and that under Section 108 of the Tax Code of 1997, a 10% VAT can be charged for gross cost or total contract cost. In view of the apparent varying opinion on the matter, you now seek for a more authoritative opinion on the proper basis for computing the value added tax, i.e.,whether VAT is imposed only in respect to labor and equipment or should the computation thereof likewise include materials. In reply thereto, 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 receipts 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 ". It is clear from the abovementioned definition that VAT is not only imposed on direct labor and equipment but rather VAT is imposed on all cost items considered in arriving at the Approved Agency Estimate (AAE) for DPWH and other government construction projects. 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 estimated contract price of a particular government construction project. In fine, an amount of ten percent (10%) VAT may be added not only to labor and equipment but to all the contract cost items in order to arrive at the total contract price inclusive of VAT. Please be informed further, that for infrastructure projects implemented by your Agency, government agencies are required to withhold creditable VAT from the gross payments made to their 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 Japan Bank for International Cooperation (JBIC) (formerly OECF) pursuant to RMC 42-99. (VAT Ruling No. 077-2001 dated October 29, 2001) This Ruling is being issued on the basis of the facts 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