BIR Ruling

July 11, 1973 Eastern Construction Company, Inc. 19 Stanford Avenue Cubao, Quezon City Attention: Mr . Magin F . San Juan Executive Vice Pres . & Gen . Mgr . Gentlemen : This refers to your letter dated June 7, 1973 requesting exemption from the payment of the 3% contractor's tax for services rendered to the National Secretariat of Social Action (NASSA), an organization formed by Catholic Bishops which undertook relief and rehabilitation work to flood stricken areas in Luzon as financed by the United States Agency for International Development, under the following particulars: cdtech "a) The United States Agency for International Development (USAID) in the Philippines has agreed to launch a project (Project/Activity No. 492-11-995-255) entitled 'Disaster Recovery (Employment and Income Opportunities thru food for Development Projects)' under the terms of the Economic and Technical Cooperation Agreement between the governments of the United States and the Philippines signed on April 27, 1951. This particular project of 'Disaster Recovery' was agreed upon by USAID/Philippines and the Philippines Government on February 5, 1973 thru their respective representatives, Mr. CHRISTOPHER H. RUSSELL (Acting Director of USAID/Philippines) and Mr. GERARDO P. SICAT (Officer-in-Charge, NEDA). 'b) This project is a massive undertaking to assist in the rehabilitation of the people in the flood ravaged provinces of Luzon and other calamity areas affected by the floods last year. The purpose is to provide food and monetary assistance to workers and their families, particularly in the 10 disaster-affected provinces of Luzon, in exchange for labor donations by the recipients for self-help social and economic development projects which contribute to flood recovery. "c) To carry out this project, USAID has chosen the Catholic Relief Services (CRS). The National Secretariat of Social Action (NASSA) and the Eastern Construction Company, Inc., (ECCOI) to manage and implement a program of Emergency Assistance, Rehabilitation and Development in the flood devastated provinces of Luzon (Bulacan, Pampanga, Tarlac, Pangasinan, Nueva Ecija, Zambales, Bataan, Laguna, Rizal, Benguet) and other disaster areas. "d) NASSA is the coordinating organization which unifies this program. With funds provided by USAID for the project, NASSA entered into a contractual agreement with Eastern Construction Company for the latter to provide the Community Development Officers and other specialists needed by CRS/NASSA to implement this 'Disaster Recovery Program' in Luzon and other disaster areas. "e) The contract between NASSA and Eastern Construction Company for the above purpose (Annex 'A' of the USAID/RP Agreement re Project 'Disaster Recovery . . .') is a 'Cost Reimbursement Contract'. This company, therefor, requested NASSA for payment/reimbursement of Contractor's (3%) Tax pursuant to Section 191(18) of the Internal Revenue Code. NASSA then referred this matter to USAID, this rehabilitation project being actually funded by USAID/Philippines. The USAID authorities, on the other hand, disallowed payment of Contractor's Tax, indicating that USAID funding for this project 'Disaster Recovery' is not taxable under the Economic and Technical Cooperation Agreement signed by the U.S. and Philippines Governments on April 27, 1951." In reply, I have the honor to inform you that the fact that the aforesaid project was financed by the USAID does not relieve you from the payment of the 3% contractor's tax imposed under Section 191 of the Tax Code on your gross receipts derived from the foregoing contract, said tax being your direct liability. Thus, in interpreting the provisions of Section 191 of the Tax Code as to the party liable for the payment of the contractor's tax (which interpretation is equally applicable to your case), the Secretary of Justice in Opinion No. 81, s. 1973, dated June 6, 1973 said: "Your query is whether 'the provision of law (Section 191 (17), National Internal Revenue Code, as amended by Presidential Decree No. 69) really intended that the consumers should pay for the 3% contractor's tax.' "The above-sited provision of the National Internal Revenue Code states that 'a contractor's tax of three per centum of the gross receipts' is imposed on 'lessors of personal property'. "After a careful study of this provision, I fail to see that the tax imposed thereby should be paid by the 'consumers'. For one, the law explicitly declares that the tax is imposed on the 'lessors of personal property', not the lessee or any other persons. For another, the basis of computation of the 3% tax is 'the gross receipts', which, with reference to a contract of lease of personal property, can of course only pertain to the gross proceeds received by the lessor. Also, the taxes imposed in Section 191 of the Tax Code are thereby denominated 'contractor's tax', imposed on so-called 'independent contractors'. (See last par. of 191; Luzon Stevedoring Co. v. Trinidad, 43 Phil. 803 (1922)) What is being taxed therefore is the activity or undertaking which is let out or sold by the contractor. And in the case of the lease of personal property which is grouped together with said activities in Section 191, supra any correctly be said that what is being taxed is the undertaking or leasing out personal property. Needless to say, it is the lessor who is engaged in such undertakings, not the lessee or what you call the 'consumer'. "I am therefore of the opinion that the lessor of personal property; and no one else should pay the 3% contractor's tax imposes by Section 191 (17) of the National Internal Revenue Code." In view of all the foregoing, this Office is constrained to deny your request. aisadc Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5