BIR Ruling

April 17, 1998 MEMORANDUM FOR: The Commissioner This refers to the deficiency assessment issued by our Office against CLARISSA U. MATA, proprietress of BESSANG PASS SECURITY AGENCY (BPSA, for brevity) of 154 G. Araneta Avenue, Quezon City involving the amount of P542,561.24 representing alleged deficiency contractor's tax and covered by Assessment No. FAN-1-86-89-110952 dated June 1, 1989. Records disclosed that BPSA is a single proprietorship duly organized and existing under and by virtue of the laws of the Republic of the Philippines. On December 23, 1980, BPSA entered into a contract with the Department of Public Works and Highways (DPWH), Port Area, Manila, for security services for the purpose of protecting the premises, buildings, machineries, equipment, vehicles, materials, supplies and other properties of the latter. To this effect and for internal revenue purposes, the 3% contractor's taxes for the duration of the contract were withheld and remitted to the BIR by the DPWH. The deficiency assessment arose after the examination of the accounting records of BPSA which accordingly, the rate of contractor's tax that should have been withheld should be 4% and not 3%. Hence, there was a deficiency on the contractor's taxes paid. This was timely protested. The taxpayer maintained that the 3% contractor's tax withheld by the DPWH was just and proper considering that the contract was entered into before the effectivity of RR 7-85 which increased the rate of contractor's tax to 4%. After a circumspect study of the records as well as the law and jurisprudence applicable thereto, we find the taxpayer's stand to be meritorious. Revenue Regulation 7-85 was promulgated to implement the application of the increased rate of contractor's tax prospectively. Accordingly, the 4% tax on gross receipts derived by contractors shall be applied on gross receipts derived from contracts entered into or renegotiated on or after October 15, 1984. It can be gleaned from the records that the contract for security services was entered into on December 23, 1980. Therefore, the 3% contractor's tax shall continue to apply. It was however argued by the Bureau that the contract between BPSA and DPWH is for the duration of one (1) year and is supposed to be terminated on December 22, 1981. Upon the termination of the same, a contract of renewal might have been executed. Number 10 of said agreement cites the effectivity thereof which is one (1) year from the date of execution. It is further provided that should there be no notice of renewal within thirty (30) days before the expiry date, the same shall be deemed renewed. It has been observed by this Office, after extensive evaluation of the contract submitted by the herein claimant, said contract contained contractual provisions in the nature of "automatic extension clauses". Nothing in the records of the case would show that there was a renewal nor renegotiation of the contract that would warrant the imposition of 4% contractor's tax. Parties to this contract remain bound during the extension of the period by the same terms and conditions previously agreed, negotiated or entered into by the parties prior to the extension. Contracts of this nature need not be renegotiated by the parties to remain effective during the extension period. The observance of the contracting parties of the terms and conditions previously agreed upon during the extension period could not be considered even in the most remote possibility, to be a new contract newly entered into by the parties. The extension does not create new obligations nor causes the extension of the old. It is simply a part and parcel of the terms and conditions embodied in the contract, containing also the automatic extension clause, originally negotiated by the parties. The services being rendered by BPSA to the DPWH was still the result of the original contract. The presumption that there was a renewal of contract should not be used as a leg to stand on the imposition of the increased rate of 4%. Premises considered, it is respectfully recommended that Assessment No. FAN-1-86-89-110952 involving the amount of P542,561.24 representing deficiency contractors tax for calendar year 1989 issued against Clarissa U. Mata, proprietress of Bessang Pass Security Agency, be cancelled and the case be considered closed and terminated. LLcd Respectfully submitted: (SGD.) RODULFO L. SALAZAR Chief, Appellate Division I CONCUR: (SGD.) ESTHER R. IBAEZ OIC, Assistant Commissioner Legal Service Recommendation-APPROVED: (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue