BIR RULING [DA-259-04]

22 (B)
DA134-00

Cruz & Co., Inc.

800 De Los Santos Avenue
Quezon City

Attention: Mr. R.E. Guinto

AVP-Finance

Gentlemen :

This refers to your letter dated March 3, 2000 stating that your company together with a local
company, which is a subsidiary of a foreign Japanese contractor, had entered into a joint venture
agreement for the purpose of bidding out a government contract; that the bidding turned out to be
successful and you expect the contract to be awarded to you by the second semester; that before the
project starts, you would like to be guided as to whether the said joint venture is subject to the
following:
"1. Secure a new Tax Identification Number (TIN);
"2. Register its books of accounts with the BIR as a new Company;
"3. Pay value-added tax (VAT) and corporate income tax;
"4. Withholding taxes on earnings derived from the joint venture for distribution
to the joint partners;
"5. Other requirements by the BIR, which is normally, subject to a juridical
company."
In reply thereto, please be informed as follows:
1. Section 236(J) of the Tax Code of 1997 provides that any person required under the
authority of the Tax Code to make, render or file a return, statement or other
document shall be supplied with or assigned a Taxpayer Identification Number
(TIN) which he shall indicate in such return, statement or document filed with
the Bureau of Internal Revenue for his proper identification for tax purposes.
Since a joint venture operates as a single entity to render service, which is
subject to value-added tax pursuant to Section 108(A) of the Tax Code of 1997,
said joint venture should be registered under the VAT law and shall be supplied
with VATRegistration Certificate and assigned a TIN upon proper application
with the BIR.
2. Section 3 of Revenue Regulations No. V-1, otherwise known as the Bookkeeping
Regulations, provides that persons, which include natural persons and
partnerships, associations companies or corporations, no matter how created or
organized, required by law to pay internal revenue taxes are required to keep
 books of accounts. While a joint venture formed for the purpose of undertaking
a construction project is exempt from the corporate income tax pursuant to
Section 22(B) of the Tax Code of 1997 and therefore it is not required to file
quarterly and final or adjustment returns with respect to income earned from
the said project, it is nevertheless subject to the business tax like the 10% value-
added tax for the services thus rendered. Accordingly, the joint venture is
required to register with the Revenue District Office (RDO) concerned its books
of accounts, invoices and receipts serially numbered in duplicate, showing the
among other things, its name or style and business address, before starting its
operation as a joint venture. (BIR Ruling No. 307-82 dated December 13, 1982)
3. Section 22(B) of the Tax Code of 1997 provides that the term "corporation" shall
include partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion), associations, or insurance
companies, but does not include general professional partnerships and a joint
venture or consortium formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium agreement under a service
contract with the Government. . .
In a numerous rulings issued by the BIR, this Office had consistently ruled that a joint
venture formed for the purpose of undertaking construction project is not
subject to the corporate income tax prescribed in Section 27 of the Tax Code of
1997. Consequently, gross payments received by the said joint venture is not
subject to the 1% [now 2%] creditable withholding tax prescribed in Section
57(B) of the said Code, as implemented by Revenue Regulations No. 2-98, as
amended by Revenue Regulations No. 6-2001, as further amended by Revenue
Regulations No. 12-2001. However, the said joint venture is subject to the 10%
value-added tax imposed under Section 108(A) of the said Code. (BIR Ruling No.
DA134-00 dated March 2, 2000; 098-94 dated April 22, 1994) IcHTAa
4. The allocation and distribution of their respective shares in the project in
consideration for their respective contributions to the said agreements is not a
taxable event and is not subject to income tax, withholding tax, value-added tax
and documentary stamp tax because the allocation is a mere return of capital
that each has contributed. Moreover, in the event that any party defer its right
to receive a specific allocation to a later phase of the project for as long as
allocation constitutes part of the total return of its capital, such deferment is still
not subject to the aforementioned taxes.
5. We hope that we have sufficiently addressed your concerns.
||| (BIR Ruling [DA-259-04], [May 17, 2004])

VAT RULING NO. 008-03

Sec. 108
VAT Ruling 004-01
 Mitsubishi Kawasaki Toyo Joint Venture
Mindanao Container Terminal Project
Sugbongcogon, Tagoloan
Misamis Oriental

Attention: Mr. Eiji Okumura

Administration Manager

Gentlemen :

This refers to your letter dated July 30, 2002, requesting for resolution of certain tax issues
with respect to the construction project called the Mindanao Container Terminal Project
(MCTP). TDAcCa
It is represented that the Mitsubishi-Kawasaki-Toyo Joint Venture (MKT-JV) is a construction
joint venture which was awarded a government project known as the Mindanao Container Terminal
Project (MCTP) in Tagoloan, Misamis Oriental, with PHIVIDEC Industrial Authority (PIA), as the
implementing government agency; that this project is funded by the Japan Bank for International
Cooperation (JBIC) through an agreement entered by the Governments of the Republic of the
Philippines and Japan by way of official Exchange of Notes; that, the following are excerpts of relevant
information in connection with this project:
"Project Background
"The Mindanao Container Terminal Project (MCTP) is a construction project
funded by the JBIC, with the exception of the tax portion representing VAT. As per the
Exchange of Notes, which among others, provides that the taxes associated with the
project shall be assumed by the Philippine Government, the Tax Portion becomes the
responsibility of the Philippine Executing Agency and is to be covered by a peso
counterpart fund provided by PIA.
xxx xxx xxx
"The JBIC fund for the project is composed of the Yen Portion and the Peso
Portion. The Philippine counterpart fund is denominated as the VAT Portion. Because
the VAT Portion will be paid to us separately from the amount of the contract price, we
will therefore receive an amount which is exclusive of VAT at one time (JBIC Fund) and
another amount which is 100% VAT at another time (VAT Portion).
xxx xxx xxx
"Project Execution
"In the execution of the project, there will be two major cost components
— service component (local construction) and imported component (importation of
materials and equipment).
"The MKT-JV will purchase goods and services from local suppliers and in the
process, the joint venture will be passed on with corresponding input taxes. As explained
above, these input taxes will be recovered through the VAT portion which PIA will pay to
the MKT-JV as part of the contract price.
 "A significant portion of the contract amount represents cost of
materials/equipment to be imported by MKT-JV for the project. If MKT-JV is the
importer, it will be paying 10% VAT on importation and will be entitled to claim the
corresponding input taxes. However, in this case, PIA was granted an automatic subsidy
on all importation for the project such that it will now be the importer/consignee and
assume all the VAT on importation through its subsidy. But it is only the VAT on
importation that is assumed by PIA since the cost of goods imported will still be
accounted and paid for by the MKT-JV.
"Because PIA is to assume the VAT on importation, it now intends to deduct the
amount of VAT covered by their import subsidy from the VAT Portion of the contract.
This now presents a complication since under normal VAT rules, the MKT-JV is supposed
to report the total contract amount and declare the corresponding output tax. For
example, if the service component amounts to P20M and imported component P80M,
then the total gross receipts would be P100M — thus MKT-JV should report an output
tax of P10M. This P10M is supposed to be the VAT Portion which MKT-JV will receive
separately as part of the contract price. Now, if PIA is credited with an input tax on
importation of P8M and deducts this tax subsidy from the P10M VAT Portion, then the
MKT-JV will end up having only P2M actual and net VAT Portion received. But then —
under the normal VAT rules — MKT-JV will still be liable to an output tax of P10M which
is not supposed to be the case.
"Issues
"In the light of the foregoing, may we request the following resolutions:
"1. Strictly for VAT reporting purposes, the gross receipts of the MKT-JV shall
only consist of the service component since the VAT on imported component is to be
paid for and accounted by PIA through its automatic tax subsidy.
xxx xxx xxx
"2. As an alternative to the above, MKT-JV shall declare the entire gross receipts
(Service Component plus Imported Component) in the VAT return but shall treat the
Imported Component as exempt transaction under Section 109(q) of the Tax Code of
1997.
xxx xxx xxx
"3. VAT payments per VAT returns filed will be deferred until actual receipt of
the VAT Portion from PIA, following BIR VAT Ruling No. 004-01, February 16, 2001, ". .
. hence the Japanese contractors are hereby allowed to file their saidVAT returns within
the time prescribed by law, provided, however, that payment of the VAT due thereunder
is hereby extended, without imposition of penalty for 10 days following the date in which
the amount intended for payment of the VATis actually received by the Japanese
contractor from RP executing agency."
"4. PIA's payment of the VAT Portion is not part of gross receipts of MKT-JV since
this merely constitutes the tax reimbursement under the Exchange of Notes."
In reply, please be informed as follows:
 1. The aforesaid EXCHANGE OF NOTES between the Government of Japan and the Republic of
the Philippines, with the PHIVIDEC Industrial Authority as RP's Executing Agency, is an Executive
Agreement which forms part of the law of the Philippines. Moreover, the facts and the law obtaining
in this case are similar to the case raised by the EMBASSY OF JAPAN for which VAT RULING No. 004-01,
dated February 16, 2001, was issued by the Commissioner of Internal Revenue, as follows:
". . . the said Exchange of Notes is an Executive Agreement between the Republic
of the Philippines and the Government of Japan, hence, forms part of the law of the
Philippines. (see the Supreme Court decision in the case of COMMISSIONER OF INTERNAL
REVENUE VS. JOHN GOTAMCO & SONS, INC., G.R. No. 31092, February 27, 1987). The
covenant of the Republic of the Philippines to assume payment of the tax and other fiscal
levies arising from the said Grant Aid Projects is binding and must necessarily be complied
with. Since payment of the VAT is the responsibility of the Executing Agency of the
Republic of the Philippines, and the delay in the payment thereof is attributable to the
said Agency, please be informed that this Office finds the aforesaid request meritorious.
Hence, the aforesaid Japanese contractors are hereby allowed to file their
said VAT returns within the time as prescribed by law provided, however, that payment
of the VAT due thereunder is hereby extended, without imposition of penalty for late
payment provided, further, that the said contractor shall remit the VAT within ten (10)
days following the date in which the amount intended for payment of theVAT is actually
received by the Japanese contractor, from RP Executing Agency."
Accordingly, your request to pay the VAT thereon within ten (10) days after receipt from PIA
of the amount intended for the VAT PORTION is hereby granted, pursuant to the provisions of the said
GOJ-RP Exchange of Notes, in relation to the above quoted VAT RULING No. 004-01, dated February
16, 2001.
2. The facts obtaining in this case are also synonymous to the case of COMMISSIONER OF
INTERNAL REVENUE VS. MARUBENI CORPORATION (G.R. NO. 137377, December 18, 2001). In this case,
the construction project undertaken by MARUBENI was classified into OFFSHORE and ONSHORE
portions. The Offshore portion consisted of materials and services undertaken in Japan and shipped to
the Philippines, while the Onshore portion consisted of materials procured from and services
undertaken by MARUBENI within the Philippines. The Supreme Court ruled that the said Offshore
portion, having been undertaken outside the jurisdiction of the Philippines, is outside its taxing
jurisdiction, hence, exempt from the old contractor's tax, as follows:
"Clearly, the service of design and engineering, supply and delivery,
construction, erection and installation, supervision, direction and control of testing and
commissioning, coordination. . . . 'of the two projects involved two taxing jurisdictions.
These acts occurred in two countries — Japan and the Philippines. While the construction
and installation work were completed within the Philippines, the evidence is clear that
some pieces of equipment and supplies were completely designed and engineered in
Japan. The two sets of ship unloader and loader, the boats and mobile equipment for
the NDC project and the ammonia storage tanks and refrigeration units were made and
completed in Japan. They were already finished products when shipped to the
Philippines. The other construction supplies listed under the Offshore Portion such as the
steel sheets, pipes and structures, electrical and instrumental apparatus, these were not
finished products when shipped to the Philippines. They, however, were likewise
fabricated and manufactured by the sub-contractors in Japan. All services for the design,
fabrication, engineering and manufacture of the materials and equipment under
 Japanese Yen Portion I were made and completed in Japan. These services were rendered
outside the taxing jurisdiction of the Philippines and are therefore not subject to
contractor's tax." cICHTD
The person liable for the aforementioned "Imported Component" is the PIA, in its capacity as
the Executing Agency of the Republic of the Philippines, pursuant to the provisions of the aforesaid
GOJ-RP Exchange of Notes. Moreover, it is represented that the PIA will pay the import taxes thereon
through fiscal subsidy, apparently referring to the Certificate of Entitlement to Subsidy issued by the
Fiscal Incentive Review Board (FIRB) to qualified Government entities, pursuant to Section 13 of the
General Appropriation Act.
Accordingly, your opinion that your taxable gross receipts shall not include the "Imported
Component" is hereby confirmed. It is understood, therefore, that you shall not be entitled to input tax
credit vis-à-vis the VAT on the said importation paid by the PIA through fiscal subsidy.
Please coordinate with the PIA for the early payment of this VAT portion and remit the same
to the BIR in accordance with the above mentioned procedures, in order not to hamper the revenue
collection efforts of this Bureau. In this regard, we hereby confirm that the payment by PIA of
the VAT portion does not form part of the gross receipts of MKT-JV since this merely constitutes the
tax reimbursement under the Exchange of Notes.
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,

||| (VAT Ruling No. 008-03, [January 10, 2003])

December 5, 2001

VAT RULING NO. 082-01

Sec. 108 (A)

VAT 077-01

Commission on Audit
Commonwealth Avenue,
Quezon City

Attention: Atty. Santos M. Alquizalas

General Counsel

Gentlemen :
 This refers to your letter dated October 9, 2001 seeking clarification on the proper basis for
computing value-added tax for government contracts.
It is represented that the Commission on Audit (COA) computes VAT at 10% of labor and
equipment costs in reviewing Approved Agency Estimates (AAEs)/COA Estimates costs on government
contracts pursuant to DPWH Order No. 30, series of 1991 which provides, thus:
"For work items involving use of materials, only labor and equipment cost components
of the estimated direct cost (EDC) are subjected to 10% VAT. The materials component
is not subjected anymore to VAT because these were already 'taxed' by the supplier. The
tax added by the supplier to the cost of these materials is part of the total cost paid by
the contractor. This is an INPUT tax which is deductive from his OUTPUT tax."
On this basis of the aforesaid order, a team of auditors from the Special Audit Division of your
Office has disallowed the amount of P3,303,048.20 expended in the renovation of the Baguio City Hall
Building allegedly representing an erroneous computation of VAT in the contractor's bid price. The
team opined that the VAT used should have been 10% to be applied only on the labor and equipment
cost components of the contractor's bid price and not on the total contract cost which includes
materials. The City Mayor of Baguio and the City Planning and Development Coordinator appealed the
subject disallowance contending since VAT is an indirect tax, the amount of tax may be shifted to the
buyer, transferee or lessees of goods or purchases or services and that under Section 108 of the Tax
Code of 1997, a 10% VAT can be charged for gross cost or total contract cost.
In view of the apparent varying opinion on the matter, you now seek for a more authoritative
opinion on the proper basis for computing the value added tax, i.e., whether VAT is imposed only in
respect to labor and equipment or should the computation thereof likewise include materials.
In reply thereto, please be informed that pursuant to Section 108 of the Tax Code of 1997, it is
provided that "There shall be levied, assessed and collected, a value-added tax equivalent to ten percent
(10%) of gross receipts derived from the sale or exchange of services, including the use or lease of
properties". The term "gross receipts" means "the total amount of money or its equivalent representing
the contract price, compensation, service fee, rental or royalty, including the amount charged for
materials supplied with the services and deposits and advanced payments actually or constructively
received during the taxable quarter for the services performed or to be performed for another person,
excluding the value-added tax".
It is clear from the abovementioned definition that VAT is not only imposed on direct labor and
equipment but rather VAT is imposed on all cost items considered in arriving at the Approved Agency
Estimate (AAE) for DPWH and other government construction projects. This necessarily includes not
only labor and equipment but also materials (whether these are bought from VAT- or non-
VAT registered suppliers) and other cost items such as Contractors All Risk Insurance, O.C.M., Profit
and such other items considered in arriving at the estimated contract price of a
particular government construction project. In fine, an amount of ten percent (10%) VAT may be
added not only to labor and equipment but to all the contract cost items in order to arrive at the total
contract price inclusive of VAT.
Please be informed further, that for infrastructure projects implemented by your Agency,
government agencies are required to withhold creditable VAT from the gross payments made to their
contractors at the rate of 8.5% pursuant to Section 114 (C) of the Tax Code of 1997. However, excepted
from the 8.5% VAT withholding are projects funded by Japan Bank for International Cooperation (JBIC)
(formerly OECF) pursuant to RMC 42-99. (VAT Ruling No. 077-2001 dated October 29, 2001)
 This Ruling is being issued on the basis of the facts represented. If, upon investigation, it will
be disclosed that the facts are different, then this Ruling shall be considered null and void.
||| (VAT Ruling No. 082-01, [December 5, 2001])

ITAD BIR RULING NO. 112-15

Philippines-Australia General Agreement on

Development Cooperation

Department of Social Welfare and Development

KALAHI CIDSS-NCDDP NPMO Bldg.
DSWD, Batasan Pambansa Complex
Constitution Hills, Quezon City
Attention: Priscilla N. Razon
Regional Director

Gentlemen :

This refers to your letters dated July 31, November 7, and November 13, 2014 requesting
confirmation that domestic purchases of goods and services made by the Department of Social Welfare
and Development ("DSWD") for the implementation of the Direct Funding Agreement between the
Government of the Republic of the Philippines (GOP), as represented by the DSWD and the Government
of Australia (GOA), as represented by the Department of Foreign Affairs and Trade (DFAT) in relation to
the Project: Improving Access to Early Learning through Community-led Approach are subject to
exemption/zero-percent value-added tax ("VAT") pursuant to the Philippines-Australia General
Agreement on Development Cooperation ("GADC").
It is represented that the GOP and GOA signed GADC on the 28th of October 1994 in Sydney,
Australia, to strengthen the existing cordial relations between the two governments and to foster
development cooperation between the Philippines and Australia. Under the GADC, the GOP and GOA
or their agencies, statutory authorities or organizations may conclude subsidiary arrangements in
respect of specific activities.
It is further represented that pursuant to the GADC, the DSWD and the DFAT entered into a
subsidiary arrangement denominated as Direct Funding Agreement ("Agreement") on the 22 May 2014
to grant support for the Philippine Government's Improving Access to Early Learning through
Community Led Approach ("Program").
It is also represented that the Program has two parts: (1) the Conditional Cash Transfer
Program (CCTP); and (2) the National Community Driven Development Program (NCDDP).
It is represented that the DSWD has a proven track record of using the community-led
approach in classroom and day care center construction. It has implemented the KALAHI
CIDSS Community Driven Development (KALAHI CIDSS CDD) since 2003 to improve responsiveness of
government to community needs through the implementation of sub-projects. KALAHI CIDSS CDD is a
multi-donor funded government project supported by World Bank, Asian Development Bank, and the
Australian Government, among others. It has resulted in improved access of communities to basic
services, increased community involvement and positive impact on household well-being. The GOP is
expanding KALAHI CIDSS CDD from 364 to 854 poorest municipalities to benefit around 5 million
households in 19,000 villages. The expanded program is the NCDDP.
The NCDDP aims to empower communities in targeted poor municipalities to achieve
improved access to services and to participate in more inclusive local planning, budgeting and
implementation. GOA will provide a contribution of a minimum of Php487,000,000 over two years
(June 2014-December 2016) to the NCDDP to fund the construction of approximately 468 day care
centers and classrooms in 177 poor municipalities nationwide including the areas affected by typhoon
Yolanda in support of the GOP's basic education and poverty reduction priorities. This is the second
phase of the GOA support using the same community-led approach for classroom and day care center
construction.
Based on the above representations, you now seek confirmation on the VAT treatment on
domestic purchases of goods and services by DSWD for the implementation of the NCDDP provided
under Section 1, Article 7 of the GADC.
In reply, please be informed that Section 114 (C) of the National Internal Revenue Code of
1997, as amended ("Tax Code") provides for the general rule that sale of goods and services to
government or any of its agencies is subject to the final withholding VAT of five percent (5%), to wit:
"SEC. 114. Return and Payment of Value-Added Tax. —
xxx xxx xxx
(C) Withholding of Value-added Tax. —
The government or any of its political subdivisions, instrumentalities or agencies
including government-owned or controlled corporations (GOCCs) shall,
before making payment on account of each purchase of goods and/or
of services which are subject to value-added tax imposed in Sections 106
and 108 of this Code, deduct and withhold a final value-added tax at the
rate of five percent (5%) of the gross payment thereof. . . For purposes
of this Section, the payor or person in control of the payment shall be
considered as the withholding agent. . ."
However, Section 106 (2) (c) of the Tax Code states that certain transactions involving the sale
of goods or properties are subject to VAT at zero percent if they are treated as such under special laws
or international agreements to which the Philippines is a signatory, viz.:
"SEC. 106. Value-added Tax on Sale of Goods or Properties. —
(A) Rate and Base of Tax. — There shall be levied, assessed and collected on
every sale, barter or exchange of goods or properties, a value-added tax equivalent to
ten percent (10%) of the gross selling price or gross value in money of the goods or
properties sold, bartered or exchanged, such tax to be paid by the seller or transferor:
Provided, that the President, upon the recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent
(12%), . . .
xxx xxx xxx
(2) Zero-rated Sales — The following sales by VAT-registered persons shall be
subject to zero percent (0%) rate:
xxx xxx xxx
 (c) Sales to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects to
zero rate.
SEC. 109. Exempt Transactions. —
(1) Subject to the provisions of Subsection (2) hereof, the following
transactions shall be exempt from the value-added tax.
xxx xxx xxx
(K) Transactions which are exempt under international agreements to which
the Philippines is a signatory or under special laws, except those under Presidential
Decree No. 529.
xxx xxx xxx
In relation to the foregoing, paragraph 1 (a), Article 7 of the GADC provides that the Philippine
Government shall subject to zero percent VAT, the direct supplies of domestic goods and services and
shall exempt direct importation of goods from VAT with respect to projects carried out in the
Philippines pursuant to the GADC, to wit:
"Article 7
Project Supplies and Professional and Technical Material and Services
1. In respect of project supplies and professional and technical material and
services whether to be imported from outside or procured within the Philippines,
the Government of the Republic of the Philippines shall:
(a) for direct supplies of domestic goods and services, subject them to zero rate
for purposes of Value-Added Tax (VAT); exempt direct importation of
goods from import duties, VAT and other taxes imposed in the
Philippines (or pay such duties thereon); and be responsible for
inspection fees, storage charges and all other levies, fees and charges;"
(Underscoring supplied)
Further, Art. 3 (d) of the GADC defines project supplies professional and technical material and
services, also the terms Australian personnel and Australian institutions, firms and organizations as
follows:
"Article 3
Definitions
In this Agreement:
a) "Australian institutions, firms and organizations" means Australian
institutions, firms or organizations engaged in a development activity
under this Agreement;
b) "Australian personnel" means Australian nationals or permanent residents or
other persons who are not nationals or permanent residents of the
Philippines who are working in the Philippines on an activity under this
Agreement and whose salaries or other costs are funded from the
contribution of the Government of Australia to the activity;
 xxx xxx xxx
e) "Project supplies" means equipment, material and other goods supplied for
the execution of development activities under this Agreement, the cost
of which is funded from the contribution of the Government of Australia
to the activity."
f) "Services" means services performed by individuals or by general partnerships
registered in the Philippines;
xxx xxx xxx
Moreover, under Article 5 (1) of the GADC, the GOP and GOA may conclude subsidiary
arrangements in respect of specific activities. Art. 5 (1) of the GADC provides:
"Article 5
Subsidiary Arrangements
1. In support of the objective of this agreement, the Government of Australia and the
Government of the Republic of the Philippines, or their agencies, statutory
authorities or organizations may conclude subsidiary arrangements in respect of
specific activities."
Based on the foregoing provisions, project supplies procured within or imported outside the
Philippines for the implementation of an activity funded by GOA in relation to the GADC shall be subject
to zero percent VAT while services will be subject to zero percent VAT only when rendered by
individuals or general professional partnerships registered in the Philippines. On the other hand,
professional and technical materials will be exempted from VAT only when it is imported by Australian
personnel or Australian institutions, firms and organizations for their professional use while engaged
in an activity under the GADC and paid for from funds provided by the GOA. These privileges, in turn,
extend to subsidiary arrangement which will be concluded between GOP and GOA in respect of specific
activities.
Accordingly, since the NCDDP was created and funded by GOA through the Agreement, a
subsidiary arrangement in support of the objectives of the GADC, this Office is of the opinion and so
holds that direct purchases of domestic goods and services of individuals or general professional
partnerships registered in the Philippines by the DSWD, as the implementing agency of the Agreement,
through the KALAHI CIDSS CDD are subject to zero percent (0%)VAT and DSWD's direct importation of
project supplies is exempted from VAT while the direct importation of professional and technical
materials will be exempted from VAT only when it is imported by an Australian institution, firm,
organization or an Australian personnel contemplated under Article 3 (a) and (b) of the GADC pursuant
to paragraph 1 (a), Article 7 of the GADC.
This ruling is issued on the basis of the facts as represented. However, if upon investigation it
shall be disclosed that the actual facts are different, then this ruling shall be without force and effect
insofar as the herein parties are concerned.

Very truly yours,

 (SGD.) KIM S. JACINTO-HENARES
Commissioner of Internal Revenue
||| (ITAD BIR Ruling No. 112-15, [April 30, 2015])

VAT RULING NO. 032-03

108 (B) (2)

VAT Ruling No. 005-99
VAT Ruling No. 049-00
VAT Ruling No. 024-00

Ms. Mirasol Patawaran Mercado

300 M. Ponce Street, Tibag
Baliuag, Bulacan

Dear Madam :

This refers to your request for VAT ruling on the taxability of the inward remittances received
by Philkoei International, Inc. (Philkoei) from Nippon Koei, Co. Ltd.., Japan (Nippon Koei) for services
rendered relative to JBIC-funded government projects.
It is represented that your client Philkoei, an engineering consultancy firm, is a domestic
corporation; that 40% of its capital stock in owned by Nippon Koei, a foreign corporation organized and
existing under the laws of Japan; that a contract for consultancy services for the Agrarian Reform
Infrastructure Support Project Phase II was executed between the Department of Agrarian Reform
(DAR) and Nippon Koei in association with Philkoei and Hydrotrerre Consultants Inc. referred therein
as "Consultant" which project is to be financed by Loan Agreement No. PH-203 entered into between
the Government of the Republic of the Philippines and the Japan Bank for International Cooperation
(JBIC); that Article V of said contract provides that DAR agrees to seek exemption, reimburse or pay in
behalf of Consultant for amounts paid on account of all taxes, duties, fees, levies and other impositions
under the laws and regulations of the Philippines or any political subdivisions or agency thereof (other
than personnel who are citizens or permanent residents of the Philippines); that according to the
association agreement among Nippon Koie, Philkoei and Hydroterre Consultants, Inc., Nippon Koei will
be the lead firm and will be responsible for the overall management and execution of services required
from said government project and as such Nippon Koei is responsible in billing the services to DAR and
collecting therefrom; that for the specific engineering and architectural designs to be performed by
Philkoei relative to such project it shall Nippon Koei who shall be responsible in paying the same based
on the method of payment provided for under Article 9 of the Association Agreement; and that for
payments made by Nippon Koei to Philkoei, the same are paid for in foreign currency inwardly remitted.
In view of the foregoing facts, you now request for clarification on whether the inward
remittance received by Philkoei from Nippon Koei with respect to services rendered relative to the said
JBIC-funded project is subject to zero-rated sales, effectively zero-rated or exempt sales? It is your
contention that such is treated as zero-rated and its basis of claiming refund for the VAT paid on such
sales of services is on the decision made by the Court of Tax Appeals in the case of Nichimen
Corporation — Philippine Branch, petitioner, vs. The Commissioner of Internal
Revenue, respondent (CTA Case No. 5470, February 16, 1999)
 In reply, please be informed that Section 4.102-2(b)2 of Revenue Regulations No. 7-95, as
amended by Revenue Regulations No. 5-96 provides for the automatic zero-rating of "Services other
than processing, manufacturing or repacking for other persons doing business outside the Philippines
for goods which are subsequently exported, as well as services by a resident to a non-resident foreign
client such as project studies, information services, engineering and architectural designs and other
similar services, the consideration for which is paid for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the BSP."
Based on the foregoing provision, it would seem that your sale of services to Nippon Koei, a
non-resident foreign corporation falls squarely on transactions that may be subject to zero-rate VAT.
However, please take note that such services rendered by Philkoei to Nippon Koei are intended to be
used in a JBIC-funded project of DAR which is located in the Philippines. ICTacD
Our VAT law, which was first adopted and promulgated under E.O. 273, effective January 1988,
is basically a Consumption Type VAT System and, in general follows the destination principle or Cross
Border Doctrine. The onus of taxation under this type of VAT System is in that country where the goods,
property or services are destined, used or consumed. This is the reason why under our VAT law, goods,
property or services destined, used or consumed in the Philippines are subject to ten percent
(10%) VAT whereas those destined, used or consumed, outside the Philippines are subject to zero
percent (0%) VAT. Therefore, the sale of services subject to zero percent VAT based on the provision
cited above is limited to such sales which are destined for consumption outside the Philippines.
(VAT Ruling No. 049-00 dated October 30, 2000 and VAT Ruling No. 005-99 dated January 13, 1999)
Inasmuch as the situs of the services rendered by Philkoei is within the Philippines, and it is
here where such services are used or consumed, such services therefore is subject to ten percent
(10%) VAT. Thus, the 10% VAT on inward remittances paid by Philkoei which is now the subject of claim
for tax refund is, therefore, denied for lack of legal basis.
Moreover, since such services rendered are related to a JBIC-funded project of DAR,
such VAT paid shall be passed on to Nippon Koei, it being the lead firm consultant of the project, which
shall then pass on such VAT to DAR. DAR in accordance with the agreement, is therefore obligated to
reimburse Nippon Koei of the VAT paid out of its local funds.
As the implementing government agency of such JBIC-funded project, DAR should not impose
the 8.5% creditable VAT withholding prescribed under Section 114(C) of the Tax Code of 1997 pursuant
to Revenue Memorandum Circular No. 42-99. (VAT Ruling No. 24-00)
The Court of Tax Appeals in the case of Nichimen Corporation — Philippine Branch, petitioner,
vs. The Commissioner of Internal Revenue, respondent (CTA Case No. 5470, February 16, 1999) will not
apply in this case for the facts attendant therein are different from the facts of the instant case. In the
said case, the issue of situs of services has never been raised and the amount being claimed for tax
credit/refund is the excess input taxes paid on account of zero-rated VAT sales of services, whereas in
the case at bar, the issue is one where the situs of the services is rendered in the Philippines and that
what is being claimed for refund is the 10% VAT paid on the sale of services which were paid for in
foreign currency inwardly remitted in accordance with rules and regulations of the Bangko Sentral ng
Pilipinas. Accordingly, the aforesaid decision can not be invoked as a precedent in the herein request.
||| (VAT Ruling No. 032-03, [June 30, 2003])