VAT Ruling No. 098-90

May 2, 1990 VAT RULING NO. 098-90 Mr. Edelberto Manalo Chief, Accounting Department Philippine National Railways C.M. Recto, Manila S i r : This has reference to your letter dated March 2, 1990 which states that you entered into a contract with Kawasaki Steel Corporation (Kawasaki), a Japanese corporation, for the PNR Maintenance Depot Construction Project, to include both labor services and supplies of materials; that the project is funded under Loan No. PH-P60 of the Overseas Economic Corporation Fund (OECF) of Japan, and that pursuant to the contract agreement, (a) all contractor's valid billings for payment shall be divided into 15% in Philippine peso and 85% in Japanese yen, and, (b) any additional expenses arising from VAT shall be borne by your company and included in the Kawasaki's billing to Philippine National Railways (PNR). It is further represented that in compliance with VAT Ruling No. 399-88, you have computed the VAT based on the entire contract amount which includes both foreign and local currency. On this basis, the VAT has been shouldered by your company on both peso and yen portions of the contract price, the output VAT of which has been properly filed by Kawasaki in its quarterly VAT returns. Furthermore, Kawasaki represented in its position paper dated March 30, 1990 that the VAT on the entire project including the yen portion, has been properly filed and paid and adjusting their VAT return at this stage will result in considerable problems to Kawasaki. Based on the foregoing facts you now request for a confirmation of the applicability of the provisions of Section 8(c) (3) of Revenue Regulation 5-87 that "where the contract involves payment in both foreign and local currency, only the service corresponding to that paid in foreign currency shall enjoy zero-rating. The portion paid for in local currency shall be subject to 10% VAT" and that the 1% expanded withholding tax is based on the adjusted contract amount. In reply, please be informed that the provisions of your contract agreement with Kawasaki can be maintained wherein the billings of Kawasaki and your corresponding payments therefor includes the VAT for the entire project price. Under the arrangement, you are still liable for the passed-on VAT for both currency portions of the contract price. This is still in accordance with the provisions of the Exchange of Notes (dated July 18, 1987) between the Philippine and Japanese governments that: "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 loan funded by OECF. ." In this instance, the PNR is the "executing agency or instrumentality" which assumes the fiscal levies or taxes, i.e. VAT, imposed on the Japanese firm, Kawasaki. For purposes of the withholding tax under RR 6-85, the 1% tax is based on the whole amount, net of VAT. LibLex Very truly yours, JOSE U. ONG Commissioner of Internal Revenue