BIR Ruling

April 13, 1973 Messrs. Sycip, Gorres, Velayo & Co. Certified Public Accountants P. O. Box 589, Manila Gentlemen : This refers to your letter dated April 5, 1973, relative to the case of your client, Hydro Resources Contractors Corporation (hereinafter referred to as Hydro), a Philippine Corporation duly registered with the Securities and Exchange Commission, the facts of which are as follows: cdta "Hydro bidded and was awarded by the National Irrigation Administration (hereinafter referred to as NIA) an entity of the government of the Republic of the Philippines, the contract for the construction of the Pantabangan Dam in Nueva Ecija and appurtenant structures. The total contract price is P122,610,365 plus US $10,428,644, this contract price includes as initial grant by NIA to Hydro in the amount of P12,451,600 which Hydro needed to finance the initial mobilization to furnish and install Hydro's camp, plant, etc. This amount was paid in cash by NIA to Hydro as follows: Amount Retention 10% Net payment Received 1971 P11,196,478.15 P1,119,647.88 P10,076,830.33 1972 P1,255,121.85 125,512.18 1,129,609.67 P12,451,600.00 P1,245,160.00 P11,206,440.00 =========== =========== =========== "Hydro started the construction work in 1971 and has adopted the completed contract method of recognizing income of this particular contract. Hydro has also considered the initial grant of P12,451,600 as part of the contract price, and therefore no income was recognized by Hydro in its books and also for income tax purposes for the years 1971 and 1972 as the construction is not yet completed. Completion is expected to be in 1975." Based on the above facts, you request opinion and advice as to whether the amount of P10,076,830.33 was income to Hydro in 1971 and, therefore, the corresponding amnesty tax of 13% may be paid under Presidential Decree No. 23, as amended. In reply, I have the honor to inform you that under the foregoing facts, the amount of P10,076,830.33 which Hydro received in 1971 cannot as yet be considered income, considering that it was part of the contract price and advance for mobilization costs, and considering further, that Hydro has adopted the completed contract method of recognizing income of this particular contract. Such being the case, Hydro cannot avail of the benefits provided for in Presidential Decree No. 23, as amended, by paying a tax equivalent to 13% of said amount, which is not yet income in 1971, although later, after completion of the contract, Hydro shall have earned and income equivalent to the aforesaid amount, more or less. In this connection, we wish to state that while we appreciate the offer of your client to pay 13% tax on an amount received by it in 1971 as part of the contract price, we cannot accept the offer as to do so may result in the government losing a portion of the income tax that may be due from Hydro when the construction of the abovementioned dam is completed in 1974 or 1975. aisa dc Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue