VAT Ruling No. 110-99

December 2, 1999 VAT RULING NO. 110-99 RMC 42-99-43-99-110-99 Follosco Morallos & Herce Attorneys At Law Suite 311 Windsor Tower 163 Legaspi Street, Legaspi Village Makati City 1229 Attention: Atty . Rachel P . Follosco Accounting Department Manager Gentlemen : This refers to your letter dated September 15, 1999 requesting confirmation of your opinion as to the value-added tax (VAT) liability of your client, NISSHO IWAI CORPORATION (NIC). It is represented that NIC is a duly registered Philippine branch office of Nissho Iwai Corporation, a corporation duly organized and existing under the laws of Japan with business address at 4-5, Akasaka 2-chome, Minato-ku, Tokyo 107-8655, Japan; that NIC is a registered VAT taxpayer as per certification dated December 29, 1995 issued by the Revenue District Office No. 49 North Makati; that NIC was duly qualified and awarded the contracts to supply certain goods and/or services to the Department of Health (DOH) in connection with the Malaria Control Project, and to the Province of Benguet (PB) in connection with the Project for the Improvement of Health System for the Province of Benguet Phase I & II; and that the said Projects are funded by grant-aid extended by the Japanese Government and subject to the terms and conditions laid down in separate but essentially identical Exchanges of Notes between the Japanese and the Philippine Governments executed in 1998. Pursuant to the contract with the DOH, NIC shall supply and deliver goods (as defined therein) procured from the Philippines, Japan, Thailand, Indonesia, Singapore, and the United States of America. The contracts (Phase I & II) with PB, on the other hand, obligates NIC to supply and deliver vehicles as well as equipment (including the installation thereof) procured from the Philippines and Japan. Based on the foregoing, you would like to request for confirmation of the following: 1. Consistent with BIR Ruling No. 43-98 dated 13 April 1998 the "tax exemption" provision quoted above {paragraph 6(1) of the Exchanges of Notes} "is actually not a grant of tax exemption privilege to the Japanese nationals who may be involved in the supply of products and services in the Project", however, "since the Philippine Government obligated itself under the Exchange[s] of Notes . . . to make the necessary measures to exempt the Japanese nationals who may be involved in the said Project[s] from internal revenue taxes which may be imposed by the Republic of the Philippines with respect to the supply of products and services " NIC "shall be exempt from the payment of the 10% VAT . . . imposed under Section 106 of the Tax Code of 1997 and considering further that [paragraph (6)(1)(g) of] the subject Exchange[s] of Notes specifically provides that the Government of the Philippines shall 'bear all the expenses other than those covered by the Grant necessary for the execution of the Project[s]'." 2. Since "it is incumbent upon the Philippine Government to see to it that the Japanese nationals who may be involved-in the Project[s] shall not pay whatever internal revenue taxes that the latter may be liable to for providing the supply of goods [and services]" for the Project, the VAT on the sale of goods and/or services by NIC to the DOH and PB is due from and payable by the DOH or PB as the case may be . Accordingly NIC is exempt not only from the burden of the VAT which necessarily follows from the fact that VAT is an indirect tax and NIC is not the ultimate consumer but also from the obligation to pay the VAT. NIC is not required to include its sales to the DOH and PB in its VAT returns and monthly report . 3. The input VAT of NIC arising from VAT which has been passed on to it by its sub-contractors and/or suppliers may form part of the cost of goods sold to the DOH and PB since NIC has no output VAT on its sales to the DOH and PB against which it can offset such input VAT. 4. NIC is exempt from withholding VAT imposed under Sec. 114 (C) of the National Internal Revenue Code thus the DOH and PB shall not deduct VAT from the payments due to NIC. (Emphasis supplied) In reply, please be informed as follows: 1. It is provided under paragraph 6(1) of the Exchanges of Notes between our Secretary of Foreign Affairs and the Ambassador Extraordinary & Plenipotentiary of Japan to the Republic of the Philippines, in connection with the said Projects, that the Government of the Republic of the Philippines will take the necessary measures, among others: to exempt Japanese nationals from customs duties, internal taxes and other fiscal levies which may be imposed in the Republic of the Philippines with respect to the supply of the products and services under the Verified Contracts, and to bear all the expenses, other than those covered by the Grant, necessary for the execution of the Project. The term "Japanese nationals" means, as defined by the said Exchanges of Notes, Japanese physical persons or Japanese juridical persons controlled by Japanese physical persons. The above-mentioned provision is actually not a grant of tax exemption privilege to the Japanese nationals who may be involved in the supply of products and services in the Project since it simply states that the Government of the Republic of the Philippines will ensure that the taxes that may be imposed by the Philippine Government on the said supply of goods and services shall be exempt from internal revenue taxes. In other words, it is incumbent upon the Government of the Philippines to see to it that the Japanese nationals who may be involved in the Project shall not pay whatever revenue taxes that the latter may be liable to for providing the supply of goods or services for the Project. Thus, there is really no tax exemption to speak of because the said taxes referred to may be borne by the Philippine Government in consideration for the economic cooperation extended by the Japanese Government with a view to strengthening friendly and cooperative relations. ( BIR Ruling No . 43-98 dated 13 April 1998). In view thereof, this Office confirms your opinion that since the Philippine Government obligated itself to make necessary measures to exempt Japanese nationals involved in the said Projects from internal revenue taxes which may be imposed by the Republic of the Philippines with respect to supply of products and services, and that the said Exchanges of Notes specifically provides that the Government of the Philippines shall bear all the expenses other than those covered by the Grant necessary for the execution of the Projects, NIC shall be exempt from the payment of the 10% VAT on the supply of goods and services, in connection with the said Projects, to the DOH and PB. ( supra ) 2. Based on the foregoing, the Philippine Government (thru the DOH and PB) will bear the payment of the VAT on the supply of materials, equipment and services by NIC used for the said Projects. Revenue Memorandum Circular No. (RMC) 42-99 dated June 2, 1999 lays down the comprehensive treatment of the tax implications arising from OECF-funded projects in the Philippines involving Japanese contractors or nationals. The rules enunciated therefrom are applicable, by analogy, to the Exchanges of Notes containing the same provisions as in the said paragraph 6 (1). Thus, the following rules on the treatment of VAT: a.) The suppliers and sub-contractors of the Japanese contractors shall bill and pass on the 10% VAT to the said Japanese contractors. The Japanese contractors, in turn, shall bill and pass on the 10% VAT to the concerned executing agencies of the Philippine government. Thus, billings to the executing government agencies shall be deemed inclusive of VAT. Since, under the said Exchanges of Notes, the Philippine Government obligated itself to make necessary measures to exempt Japanese nationals involved in the said Projects from internal revenue taxes, then the VAT is to be paid out of the Philippine counterpart fund. [RMC 42-99 (A)(2)] b.) The Japanese contractors or nationals shall file the prescribed VAT returns on the gross receipts derived from the said Projects, claim their input taxes from their purchases of goods, properties and services from their suppliers or sub-contractors, and shall pay the VAT thereon, after offsetting the allowable input taxes, considering that the amount intended for payment of the VAT has already been collected and received by the Japanese contractors or nationals from the executing government agencies as part of the total invoice price. [RMC 42-99 (A)(3)] Accordingly, NIC is required to include its sales to the DOH and PB in its VAT returns and monthly reports. 3. Contrary to your opinion, the input VAT passed on to NIC by its subcontractors and/or suppliers shall not form part of the cost of the goods of the DOH and PB, because this may be claimed against its output VAT. [Refer to No. 2 (b) above] 4. The invoice billings of the Japanese contractors or nationals with executing government agencies are exempt from the 8.5% creditable VAT withholding prescribed under Section 114 (C) of the National Internal Revenue Code of 1997. Accordingly, the executing agencies of the Philippine government shall not withhold the 8.5% creditable VAT from the said billings of the Japanese contractors. [RMC 42-99(A)(1)] In view of all the foregoing, we hereby confirm your opinion that NIC shall be exempt from the payment of the VAT on its sale of goods and/or services to DOH and PB in connection with the said Projects funded by the Japanese government, and that such tax shall be shouldered and borne by the said executing government agencies. Consequently, the DOH and PB shall not deduct or withhold VAT from the payments due to NIC from the said sale. However, this Office is of the opinion as it hereby holds that NIC is required to include its sales to the DOH and PB in its VAT returns and monthly report; and that the input VAT, which is shifted or passed on to it by its subcontractors and / or suppliers, should not form part of the cost of goods of the said government agencies for the reasons above stated. Attached for your reference is RMC 42-99. This ruling is issued based on the foregoing facts as represented. If upon investigation, it will be disclosed that the said facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group