The implementation of projects funded by Japan’s official development assistance (ODA) is again at risk of being delayed, after the Bureau of Internal Revenue declared that Japanese contractors cannot pass on the full 12-percent value-added tax (VAT) to the Philippine government.
Internal Revenue Commissioner Kim Jacinto-Henares made this pronouncement in Revenue Memorandum Circular (RMC) 45-2015, which clarified the sharing of the tax burden between the Philippines and the Japanese contractors of the projects funded under Japan’s Overseas Economic Cooperation Fund (OECF).
The OECF is a regular source of foreign funds for the Philippines, and from which, according to the latest figures from the Bureau of the Treasury, some P1.81 billion had been borrowed by the government from January to July this year.
Henares said that although the Exchange of Notes between the Philippines and Japan regarding OECF-funded projects provided that the Philippines will shoulder all taxes imposed on Japanese contractors on the payments made by the Philippine government to them using the OECF, these Japanese contractors cannot pass on the 12-percent VAT they incurred from other suppliers and subcontractors.
The sharing of the tax burden between the Philippine government and the Japanese contractors is indicated in RMC 42-99 issued in 1999. The old circular provided that the Philippines will shoulder the 8.5- percent creditable withholding tax on payments to the Japanese contractors, who, in turn, can pass on the VAT they incur from their other suppliers and subcontractors.
However, the RMC 45-2015 provided that the sharing of the tax burden is no longer operative with the amendments in the VAT law, which indicated that payments made by the government shall be subject to a 5-percent final VAT withholding tax.
Under the final VAT withholding tax system implemented on payments made by the Philippine government, a final VAT of 5 percent is withheld by the government as payor, while the remaining 7-percent VAT shall already be considered the input VAT of the payee on the transaction.
“The Japanese contractors of OECF-funded projects cannot include in its billing the whole 12-percent VAT that will be assumed by the Philippine government on its instrumentalities or agencies in accordance with the Exchange of Notes,” the circular read.
Despite this, National Economic and Development Authority (Neda) Deputy Director General Rolando G. Tungpalan said the Japanese government has not given any indication that it intends to put on hold any Japan-funded projects.
“In the last state visit [of President Aquino], Japan and the Philippines even signed three loan agreements,” Tungpalan said in a telephone interview.
In 2007 the implementation of nine Japan-funded projects was put on hold due to the government’s non-payment of VAT reimbursement to Japanese businessmen.
Neda admitted that the nonpayment of VAT was the chief reason behind the delay in Japan’s release of funds for ODA projects.
At the time, VAT reimbursements due to Japanese businessmen amounted to P300 million. The government said, however, that it needed to process some documents before it could release the payments.
In 2004 the Neda disclosed that it did not process any Japan International Cooperation Agency grants due to the issue on VAT reimbursements to Japanese businessmen.
The nonpayment of VAT had caused the Japanese government to threaten to withhold the future release of funds for several grant-aid projects.
Up to now there are several Japanese ODA projects that are yet to be competed due to delays in implementation and procurement.
(With Cai U. Ordinario)