Legal basis and tax framework
- The Circular applies the tax treatment of Japanese contractors and nationals engaged in OECF-funded projects in the Philippines under Exchange of Notes between the Japanese Government and the Republic of the Philippines for OECF Funded Projects.
- The Circular references Section 114(C) of the National Internal Revenue Code of 1997 (then Section 110(c), old NIRC) on 8.5% creditable VAT withholding.
- The Circular references Section 204(C) of the Tax Code of 1997 on refund or credit of erroneously paid taxes.
- The Circular references Section 1% creditable expanded withholding tax under existing expanded withholding tax rules, as amended by Revenue Regulations No. 2-98.
Policy on OECF tax burden
- The Exchange of Notes requires the Republic of the Philippines to exempt the OECF Fund from all fiscal levies or taxes imposed in the Philippines on and/or in connection with the Project Loan, Engineering Service Package Loan, and Commodity Loan, including interest accruing therefrom.
- The Exchange of Notes requires the Republic of the Philippines (itself or through executing agencies or instrumentalities) to assume all fiscal levies or taxes imposed in the Philippines on Japanese firms and nationals operating as suppliers, contractors, or consultants on and/or in connection with income accruing from supplying products and/or services under the Project Loan.
- The tax treatment requires that Japanese contractors and nationals shall not be required to shoulder the fiscal levies or taxes associated with the project; the executing government agencies bear the tax burden.
- The Circular’s rules implement the intended allocation by adjusting VAT withholding, VAT billing/handling, income tax payment, expanded withholding tax remittance, and refund recovery mechanics.
Scope: who receives the treatment
- The Circular governs Japanese contractors or nationals engaged in OECF-funded projects in the Philippines.
- The tax treatment applies to Japanese firms and nationals operating as suppliers, contractors, or consultants on and/or in connection with income accruing from the supply of products and/or services under the Project Loan.
- The Circular directs actions primarily to executing government agencies and to BIR collection and enforcement personnel, including the appropriate Revenue District Officer.
VAT rules and withholding
- Invoice billings by Japanese contractors to executing government agencies are exempt from the 8.5% creditable VAT withholding under Section 114(C) of the National Internal Revenue Code of 1997 (then Section 110(c), old NIRC) as referenced in Revenue Memorandum Circular No. 32-99.
- Executing agencies must not withhold the 8.5% creditable VAT from the Japanese contractors’ invoice billings.
- Suppliers and sub-contractors must bill and pass on the 10% VAT to the Japanese contractors.
- Japanese contractors must bill and pass on the 10% VAT to the executing government agencies.
- Billings to the executing government agencies are deemed inclusive of VAT, and because the OECF Fund will not be used to pay the tax, the VAT is paid out of the Philippine counterpart fund.
- Japanese contractors must file the prescribed VAT returns on gross receipts from OECF-funded projects, claim input taxes on purchases of goods, properties, and services from suppliers or sub-contractors, and pay VAT after offsetting allowable input taxes, taking into account that the VAT payment has already been collected by the Japanese contractors or nationals as part of the total invoice price.
- If executing agencies previously withheld the 8.5% creditable VAT, the withheld amount must be deducted against the VAT due from the Japanese contractors.
- If the Japanese contractors’ VAT returns show excess VAT payments, the excess constitutes taxes erroneously paid and received.
- Excess tax payments are refundable or creditable under Section 204(C) of the Tax Code of 1997, either in cash or Tax Credit Certificate, at the Japanese contractors’ option, subject to a two-year prescriptive period for the claim filed with the Commissioner or the Court of Tax Appeals.
Income tax treatment and recovery
- Japanese firms or nationals acting as suppliers, contractors, or consultants must file the prescribed income tax returns on income accruing under the OECF project arrangements.
- Because executing government agencies are mandated under the Exchange of Notes to assume payment of the income taxes due, Japanese firms or nationals need not pay the taxes due under the applicable arrangement.
- The concerned Revenue District Officer must collect the income taxes from the concerned executing government agencies.
- If income taxes were previously paid directly by Japanese contractors or nationals, the cash refund must be recovered from the executing government agencies upon presentation of proof of payment by the Japanese contractors or nationals.
Creditable expanded withholding tax
- Executing government agencies must remit the prescribed 1% creditable expanded withholding tax to the BIR under expanded withholding tax regulations amended by Revenue Regulations No. 2-98.
- Because executing government agencies assume payment of the income taxes due by virtue of the agreement, the 1% creditable expanded withholding tax must not be deducted from income payments to Japanese contractors or nationals; executing agencies must assume payment out of their own funds.
- Executing government agencies must furnish Japanese contractors or nationals with a withholding tax statement showing the amount of the 1% creditable expanded withholding tax remitted to the BIR.
- The 1% creditable expanded withholding tax remitted is credited or deducted by Japanese contractors or nationals in computing the net income tax due under the income tax computation in paragraph B of the Circular.
- If executing government agencies withheld the 1% creditable expanded withholding tax instead of assuming it out of their own funds, the corresponding cash refund must be recovered by the Japanese contractors or nationals from the executing government agencies.
Conformity, amendment, and directive compliance
- Any ruling or revenue issuance inconsistent with the Circular is amended, repealed, or modified accordingly.
- Internal revenue officers and others concerned are enjoined to strictly implement the provisions of BIR Revenue Memorandum Circular No. 42-99.