VAT Ruling No. 091-02

December 19, 2002 VAT RULING NO. 091-02 080-2001 Santos & Santos Law Offices Suite F3, 4/F, JAKA II Building Legaspi Street Legaspi Village Makati City Attention: Atty. Susan M. Santos Gentlemen : This refers to your letter dated August 28, 2002 stating that Hanjin Engineering & Construction Co., Ltd. (Hanjin) is a corporation duly organized and existing under and by virtue of the laws of Korea, while Itochu Corporation (Itochu) is a corporation duly organized and existing under and by virtue of the laws of Japan; that sometime in 1997, Hanjin and Itochu established a joint venture agreement to undertake the construction of the Metro Manila Strategic Mass Rail Transit Development (Line 2) Project particularly Construction Packages P-2 (Substructure) and P-3 (Superstructure and Stations); that on the same year, the Hanjin-Itochu joint venture entered into contracts with the Light Rail Transit Authority (LRTA), a government owned and controlled corporation created under Executive Order No. 603, for the implementation of the afore-mentioned construction packages; that the financing for the said construction packages were made available for funding through the Japan Bank for International Cooperation (JBIC), formerly known as the Overseas Economic Cooperation Fund (OECF), by means of the 21st Yen Credit Package extended to the Philippine government; and that you have submitted the following documents: (1) Contracts for the Metro Manila Strategic Mass Rail Transit Development (Line 2) Project, Package P-2: Substructure and Package P-3: Superstructure and Stations; 2) Joint Venture Agreement between Hanjin and Itochu; and (3) Executive Order No. 603. In connection therewith, you now request for a ruling that the joint venture which was established to undertake construction projects, specifically, the Metro Manila Strategic Mass Rail Transit Development (Line 2) Project, Packages P-2 (Substructure) and P-3: (Superstructure and Stations) under the LRTA is exempt from the 8.5% creditable value-added tax. In reply thereto, please be informed that in BIR VAT Ruling No. 080-2001 dated November 20, 2001, this Office ruled that as a concession for the 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. Accordingly, this Office holds that the rule now is that no withholding of 8.5% VAT 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 objects 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. IN VIEW OF THE FOREGOING, this Office holds that the joint venture which was established to undertake construction projects, specifically, the Metro Manila Strategic Mass Rail Transit Development Project, Packages P-2 and P-3 under the LRTA is exempt from the 8.5% creditable value-added tax. 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, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group