Taxing JICA-funded projects

SUITS THE C-SUITE By Rubina P. Bundoc-Aquino

Business World (03/13/2017 – p.S1/4)

For many years now, the Government of Japan has been one of the largest providers of bilateral assistance to the Philippines. The Philippines undertakes several projects funded by Official Development Assistance (ODA) loans or grant aid from the Japan International Cooperation Agency (JICA).

To preserve the JICA fund strictly for the execution of appropriate projects, the Governments of Japan and the Philippines have agreed, under an Exchange of Notes, on a tax assumption scheme, whereby the Philippine Government will assume all fiscal levies and taxes due from Japanese companies operating as suppliers, contractors and/or consultants, and from Japanese employees in the Philippines, in relation to the implementation of such projects.

The Exchange of Notes typically provides that the Government of the Republic of the Philippines will, by itself or through its executing agencies, assume all fiscal levies and taxes imposed in the Republic of the Philippines on Japanese companies operating as suppliers, contractors and/or consultants with respect to the payments for and the income accruing from the supply of products and/or services required for the implementation of the projects enumerated in the List; and all fiscal levies and taxes imposed in the Republic of the Philippines on the Japanese employees engaged in the implementation of the projects enumerated in the List, with respect to the personal income derived from Japanese companies operating as suppliers, contractors, and/or consultants. Recognizing the obligations of the Philippine Government under the Exchange of Notes, the Bureau of Internal Revenue (BIR), in June 1999, issued Revenue Memorandum Circular (RMC) No. 42-99, to provide for the income tax and Value-Added Tax (VAT) treatment of JICA-funded projects.

For income tax, the RMC provides that the Japanese contractor shall file its income tax return and the BIR shall collect the income tax due from the government executing agency. The government executing agency shall not withhold any expanded withholding tax from its payment to the Japanese contractor.

When it comes to VAT, the RMC provides that suppliers and subcontractors will bill and pass on the then 10% (now 12%) VAT to the Japanese contractor, who, in turn, will bill and pass on the VAT to the concerned government executing agency.

The RMC also provides that the billings of the Japanese contractor will be exempt from the then 8.5% creditable withholding VAT.

In July 2005, Republic Act No. 9337 was enacted, which amended the Tax Code to include the introduction of a 5% final withholding VAT on government money payments, to replace the 8.5% creditable withholding VAT.

Despite this change, the government executing agencies continued to not withhold any VAT on payments to Japanese contractors.

Ten years later, in August 2015, the BIR issued RMC No. 45-2015 declaring that government executing agencies shall assume the 5% final withholding VAT, but that the Japanese contractor “cannot include in its billing the whole twelve percent (12%) VAT that will be assumed by the Philippine Government or its instrumentalities or agencies in accordance with the Exchange of Notes.”

The RMC created confusion and uncertainty for the Japanese contractors involved in JICA-funded projects.

As the RMC provided that the Japanese contractors cannot bill “the whole 12% VAT,” doubt was raised as to whether the contractor shall bill only a 5% VAT or not bill any VAT at all. Note that under the Tax Code, the transaction is subject to the 12% VAT and that the Exchange of Notes merely provided a tax assumption scheme.

The RMC failed to provide guidance on what to do with the input VAT passed on to the Japanese contractors by their suppliers and subcontractors. While Japanese contractors were not allowed to bill the whole 12% VAT, their suppliers and subcontractors still passed on to them a 12% VAT.

Early this year, however, BIR Commissioner Caesar R. Dulay issued RMC No. 8-2017 dated Jan. 9, to clarify the tax treatment of VAT on government money payments for JICA-funded projects. The RMC provides that “all taxes associated with the project shall be assumed by the executing government agencies. Thus, this Circular is about clearly acknowledging — and accordingly implementing — this obligation of the Philippine government under the Exchange of Notes.”

As applied to VAT, the Circular provides that the 12% VAT on sales of goods and services to the Government shall be assumed by the Philippine Government or its executing agencies pursuant to the Exchange of Notes.

Similar to RMC No. 42-99, the new circular provides that VAT-registered suppliers and subcontractors shall bill and pass on the 12% VAT to the Japanese companies/contractors, who, in turn, shall include in their billing and pass on the 12% VAT to the concerned executing agencies of the Republic of the Philippines.

Since the Exchange of Notes stipulates that the JICA Fund shall not be used to pay for tax, the VAT is the responsibility of the Philippine government.

The circular also provided guidelines on VAT return preparation. Thus, Japanese contractors shall file the VAT returns on gross receipts derived from JICA-funded projects, claim their input taxes from their purchases of goods, properties and services from their suppliers or subcontractors, and pay the output tax, after offsetting the creditable or allowable input taxes.

Consistent with the current VAT regulations, RMC No. 8-2017 does not allow input taxes arising from transactions attributable to activities unrelated to the JICA-funded project to be credited against output tax on gross receipts from the project.

While RMC No. 08-2017 provides much needed clarity on the tax treatment of JICA-funded projects, there is still much that requires clarification.

In past projects, there have been delays in VAT payments by the government executing agencies, and the Japanese contractor is left to determine what to declare in its VAT return and whether to remit VAT to the BIR, since the payment of the principal from JICA had already been received. The BIR had consequently ruled that in cases of delayed payments by the government, the Japanese contractor is allowed to remit VAT within 10 days from receipt of the VAT from the government executing agency. This is a situation that can still possibly occur and one that the BIR may eventually have to clarify as well.

Another recurring issue is the payment of Local Business Tax (LBT) which government will need to address. Under the tax assumption scheme in the Exchange of Notes, the Philippine Government will assume all fiscal levies and taxes due from Japanese companies, which includes not only national taxes (such as income tax and VAT) but also local taxes, in particular, the LBT.

Since there are no guidelines yet regarding the declaration of gross receipts by Japanese contractors and the collection by the concerned local government unit of the LBT from the government executing agency, Japanese contractors usually advance payment of the LBT, which they later try to collect from the government executing agency.

Despite issues such as these, RMC No. 8-2017 is definitely a welcome development for Japanese contractors. Considering that the projects and programs undertaken are meant to provide development assistance to the country, we hope that our regulatory authorities will take more steps towards making it easier for project contractors to undertake these projects in accordance with our bilateral commitments.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Rubina P. Bundoc-Aquino is a Tax Partner of SGV & Co.