BIR Ruling

October 11, 1976 Messrs. Joaquin Cunanan & Co. Certified Public Accountant P. O. Box 2288 Manila Gentlemen : This refers to your letter dated July 14, 1976 stating that the National Power Corporation (NPC) has been given the task by the National Government to develop the Hydroelectric Generation of power and production of electricity from nuclear, geothermal and other sources as well as the transmission of electric power on a nationwide basis; that NPC entered into a contract with Westinghouse, S.A. (WELSA) to construct and install the nuclear plant project; that this entire contract was in turn assigned by WELSA to Westinghouse International Projects Company (WIPCO); that it estimated that the project will take five to six years before it will be completed and operational. It is also represented that under Presidential Decree No. 380, as amended, the contractor (WIPCO) may be exempt from all direct and indirect taxes; that if the contractor will be required to pay taxes, it is stipulated in the contract that NPC will fully reimburse them; and that although WIPCO might be exempt from all taxes, it is not, however, exempt from reporting and bookkeeping requirements. Under the foregoing facts, you request confirmation that WIPCO can report and record its income on a completed contract method under Section 44(b) of Revenue Regulations No. 2. In rely, I have the honor to inform you that Section 44(b) of Revenue Regulations No. 2 provides as follows: "SEC. 44. Long-term Contracts . Income from long-term contracts is taxable for the period in which the income is determined, such determination depending upon the nature and terms of the particular contract. As used herein the term 'long-term' contracts means building, installation, or construction contracts converting a period in excess of one year. Persons whose income is derived in whole or in part from such contracts may, as to such income, prepare their returns upon the following bases: "xxx xxx xxx "(b) Gross income may be reported in the taxable year in which the contract is finally completed and accepted if the taxpayer elects as a consistent practice to so treat such income, provided such method clearly reflects the net income. If this method is adopted there should be deducted from gross income all expenditures during the life of the contract which are properly allocated thereto, taking into consideration any material and supplies charged to the work under the contract but remaining on hand at the time of the completion. "Where a taxpayer has filed his return in accordance with the method of accounting regularly employed by him in keeping his books and such method clearly reflects the income, he will not be required to change to either of the methods above set forth. If a taxpayer desires to change his method of accounting in accordance with paragraphs (a) and (b) above, a statement showing the composition of all items appearing upon his balance sheet and used in connection with the method of accounting formerly employed by him, should accompany his return." Inasmuch as the contract assigned to WIPCO under the facts as hereinabove stated in a long-term contract, it can report and record its income on a completed method of reporting income in accordance with the aforequoted provisions of the Income Tax Regulations. aisadc Very truly yours, EFREN I. PLANA Acting Commissioner of Internal Revenue TAN-1456-040-3 "TAXPAYERS SHOULD INDICATE THEIR TAN IN ALL COMMUNICATIONS TO THE BIR."