VAT Ruling No. 106-99

November 5, 1999 VAT RULING NO. 106-99 Sec. 114 (C); 57 (B)-000-00-106-99 Kubota Corporation C.M. Pancho Construction, Inc. Joint Venture/Consortium 71-A Scout Borromeo St. Diliman, Quezon City Attention: Mr . Tim A . Acedo Tax Division Gentlemen : This refers to your letter dated July 26, 1999 in connection with the project of the National Irrigation Administration (NIA) particularly the Lower Agusan Development Project - Irrigation Component for the Design, Manufacture, Supply, Delivery, Installation, Testing and Commissioning of the Submersible Pump including the related Electrical and Mechanical Works with the construction of Pumping House for Bit-os and Aupagan Pumping Stations under Package - I; that the above-mentioned project is financed by the Overseas Economic Cooperation Fund (OECF) from Japan; that the gross payments to the said joint venture/consortium from the NIA has been exempted from the expanded withholding tax prescribed under Section 57(B) of the Tax Code of 1997 per BIR Ruling No. DA-586-98 dated December 29, 1998; and that as represented in the said ruling, Kubota Corporation - C.M. Pancho Construction, Inc. Joint Venture/Consortium was established between Kubota Corporation with principal office at 1-3, Nihombashi-Moromachi 3-Chome, Chuo-ku, Tokyo-103, Japan and C..M. Pancho Construction, Inc. with principal office at 71-A Scout Bonomeo St., Diliman, Quezon City. Based on the foregoing, you now request for a ruling that the Kubota Corporation - C:M. Pancho Construction, Inc. Joint Venture/Consortium is not subject to the 8.5% creditable VAT and also to the 1% expanded withholding tax. In reply, please be informed that, as amplified under Revenue Memorandum Circular 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 which read as follows: "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 42-99 established that under the first clause cited above, 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 VAT withholding prescribed under Section 114(C) of the National Internal Revenue Code of 1997 for government public works contractors undertaking OECF-funded projects. Otherwise, the covenant 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, might be violated. The fact that the OECF-funded Lower Agusan Development Project is being undertaken by a consortium composed of both Japanese and Filipino corporations will not invalidate the tax-free treatment of the fund. For that matter, even if only Filipino corporations or nationals happen to be the main contractor of the project, the same tax-free treatment should prevail. Verily, the above-cited first clause of the Exchange of Notes is particularly directed towards the non-utilization of the loan amount in the payment of taxes and is not dependent upon the nationality of the project contractor. Hence, this Office is of the opinion, and so holds, that the National Irrigation Administration could properly recognize the non-imposition of the 8.5% VAT withholding to the Kubota-C.M. Pancho Construction Consortium. 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 Kubota-C.M. Pancho Construction Consortium is not considered as a taxable corporation in itself, hence gross payments by NIA to the former is not subject to the expanded withholding tax prescribed under Section 57(B) of the Tax Code of 1997 (BIR Ruling DA-586-98 dated December 29, 1998). 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 C.M. Pancho Construction, 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 Kubota Corporation shall be assumed by NIA, 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 the notice to the National Irrigation Administration insofar as it is concerned. Finally, 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.) BEETHOVEN L. RUALO Commissioner of Internal Revenue