BIR Ruling

August 29, 1973 The Chairman Export Processing Zone Authority Boston Street, Port Area Manila S i r : This refers to your letter dated August 8, 1973, requesting opinion on the question of what should be the basis of the contractor's tax due from Pacific Equipment Corporation (PECORP) whether the tax shall be based (a) on the percentage fee of the said contractor, or (b) on the project cost, plus contractor's fee. cdta It appears that PECORP and the Export Processing Zone Authority (AUTHORITY) entered into a Memorandum of Agreement on May 14, 1973, pursuant to which PECORP shall undertake the construction of Dam No. 1 of the Bataan Export Processing Zone in Mariveles, Bataan. AUTHORITY on the other hand, agrees to pay PECORP a percentage fee to be computed on cost plus basis, but not to exceed 17% of target cost estimate. AUTHORITY further agrees to reimburse PECORP of all expenses forming part of the project cost and upon which shall be based the fee of PECORP, plus or minus the savings or overrun; that incidental expenses, not forming part of project cost, incurred in the accomplishment of the project shall likewise be reimbursed to PECORP; that PECORP shall submit to AUTHORITY for reimbursement or payment, a monthly progress billing for actual cost of accomplishment during the preceding months. In your abovementioned letter you represented that the cost of the materials, labor and equipment necessary for the construction and completion of the project shall be for the exclusive account of AUTHORITY; that PECORP shall purchase all the necessary materials, hire and provide the required laborers, and lease and/or purchase all the equipment needed for the project work, for and in behalf of AUTHORITY. And in your letter dated August 24, 1973, you further stated that "As previously represented, PECORP undertakes to purchase for and on behalf of the Authority the necessary materials, equipment and supplies to be used in the construction of said dam. However, in the procurement of said items, PECORP will utilize (a) the funds of the Authority under a petty cash system of payment, and (b) the official forms of the EPZA, e.g. requisition and issue voucher, purchase order etc. The only participation of PECORP in the procurement process is to undertake the canvass of prices of the items to be purchased from at least three (3) reputable dealers." In reply, I have the honor to inform you that on the basis of the foregoing representations, this Office is of the opinion that the costs of materials, supplies and equipment do not form part of the gross receipts of PECORP. However, the amounts to be paid PECORP for incidental expenses, as specifically itemized under Item No. 5 of the Memorandum of Agreement dated May 14, 1973, form part of its gross receipts. Accordingly, PECORP shall be liable for 3% contractor's tax on the following: (a) the contractor's fee agreed upon (b) the amounts received for incidental expenses mentioned in Item No. 5 of the aforementioned Memorandum of Agreement. However, it shall not be liable for 3% tax on the costs of materials, equipment and supplies purchased on behalf of AUTHORITY and paid for out of funds of AUTHORITY. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5