VAT Ruling No. 092-02

December 23, 2002 VAT RULING NO. 092-02 RMC 42-99 VAT Ruling No. 024-2000 DA-036-2000 Shimizu Corporation/F.F. Cruz and Co.,Inc. Joint Venture for Batangas Port Development Project-Phase II 5th Floor, King's Court Bldg. I 2129 Pasong Tamo St.,Makati City Attention: Mr. Honami Noto Managing Partner Gentlemen : This refers to your letter dated January 28, 2002 requesting for a confirmation of your opinion that Shimizu Corporation/F.F. Cruz and Co., Inc. Joint Venture is exempt from the 8.5% creditable withholding VAT and the 1% expanded withholding tax pursuant to Revenue Memorandum Circular (RMC) No. 42-99. It appears that Shimizu Corporation of Japan, together with a Filipino company, F.F. Cruz and Co.,Inc. formed the Shimizu Corporation/F.F. Cruz and Co.,Inc. Joint Venture; that said entity was responsible for the civil and marine works for the Batangas Port Development Project-Phase II, under the Philippine Ports Authority (PPA);and that said project was financed by the Japan Bank for International Cooperation (JBIC) [formerly Overseas Economic Cooperation Fund of Japan (OECF)] under JBIC Loan No. PH-P187. In reply, please be informed that under RMC No. 42-99 dated June 2, 1999, OECF Funded Projects are covered by the standard clauses of the Exchange of Notes between the Japanese Government and the Republic of the Philippines, pertinent portion of which states: "The government of the Republic of the Philippines will exempt the Fund from all fiscal levies or taxes imposed in the Republic of the Philippines on and/or in connection with the Project Loan, the Engineering Service Package Loan and the Commodity Loan as well as interest accruing therefrom." "The Government of the Republic of the Philippines will, itself or through its executing agencies or instrumentalities, assume all fiscal levies or taxes imposed in the Republic of the Philippines on Japanese firms and nationals operating as suppliers, contractors or consultants on and/or in connection with any income that may accrue from the supply of products and/or services to be provided under the Project Loan." RMC No. 42-99 established that under the first clause as above-stated, it is the intention of the two governments not to use the proceeds of the loan in the payment of all fiscal levies or taxes imposed by the Philippines. In view thereof, this Office held that the executing government agencies should not impose the 8.5% creditable withholding VAT prescribed under Section 114(C) of the Tax Code of 1997, for government public works contractors undertaking OECF Funded Projects. Otherwise, the agreement not to subject the funded amount to taxes, which is the clear intent of both the Philippine and the Japanese Governments under the Exchange of Notes, will be negated. The fact that the OECF funded construction of civil and marine works of the Batangas Port Development Project-Phase II for the Philippine Ports Authority (PPA) is being undertaken by a consortium composed of both Japanese and Filipino corporations will not invalidate the tax-free treatment of the fund. Moreover, by virtue of the aforestated second clause of the Exchange of Notes, the Philippine Government, or its agencies or instrumentalities, has bound itself to assume all fiscal levies or taxes in the Philippines on Japanese firms and nationals operating as suppliers, contractors, or consultants on and/or in connection with any income accruing from products and/or services provided under the Project Loan. With respect to the exemption from the 1% withholding tax, this Office has already held that, for being a joint venture or consortium formed for the purpose of undertaking construction projects, the Shimizu Corporation/F.F. Cruz and Co., Inc. Joint Venture is not considered as a taxable corporation in itself, hence gross payments by PPA to the former is not subject to the expanded withholding tax prescribed under Section 2.57.2(E) of Revenue Regulations No. 2-98, implementing Section 57(B) of the Tax Code of 1997. (VAT Ruling No. 024-2000 dated July 27, 2000 and BIR Ruling No. DA-036-2000 dated January 18, 2000) However, each of the co-venturers is liable for the payment of their respective corporate income taxes under Sections 27 and 28 of the Tax Code of 1997 pertaining to the separate earnings each will derive from the above-mentioned projects. Hence, a Filipino contractor performing OECF Funded projects, such as F.F. Cruz and Co., Inc. remains subject to income tax. But by virtue of the second clause under the Exchange of Notes cited above, the income tax pertaining to the project and accruing to Shimizu Corporation shall be assumed by PPA, the former being a Japanese corporation doing an OECF Funded Project, thereby entitling it to the coverage of the above-cited agreement. This will, therefore, serve as a notice to PPA insofar as it is concerned. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group