BIR Ruling

December 17, 1974 3rd Indorsement Respectfully returned to the Honorable, the Chairman, Commission on Audit, Quezon City, the within papers relative to the request for clarification on the procedure or manner of imposing the collection, at source, of the 3% contractor's tax as required by existing revenue laws. acd The ruling contained in the true copy of the letter of the Revenue Director, Revenue Region No. 7, North Manila, dated August 2, 1974, is consistent with rulings issued by this Office holding that the 3% contractor's tax is based on gross receipts actually received by the contractor. This, where a building contractor, pursuant to a contract, received partial payments, from time to time pending completion of the construction minus 10% thereof as retention, the basis of the tax is the gross amount received minus 10% thereof. (BIR Ruling No. 173, s. 1960; BIR Ruling dated November 3, 1971, and others). It was in conformity with the foregoing that the Department of National Defense prepared the attached proposed Memorandum establishing a uniform procedure in the withholding of the 3% contractor's tax, viz.: deduction of the 3% contractor's tax should be levied on the amount to be paid or paid to contractor after the 10% retention has been withheld. However, it is the view of that Commission that the 3% tax should be imposed upon the value of the work satisfactorily completed as it represents the full consideration that is due and payable to the contractor before the deduction of the 10% retention fee. This view is illustrated in this manner: First Partial Payment: (a) Contract Price (Assumed) P2,000.000.00 (b) Worked Accomplished: 50% value at P1,000,000.00 Less: 3% tax P30,000.00 10% retention 100,000.00 P130,000.00 (c) Amount Paid Contract P870,000.00 =========== Second Partial Payment: (a) Contract Price (Assumed) P2,000,000.00 (b) Worked Accomplished: 25% valued at P500,000.00 Less: 3% tax P15,000.00 10% retention 50,000.00 65,000.00 (c) Amount Paid Contract P435,000.00 Third Partial Payment: (a) Contract Price (Assumed) P2,000,000.00 (b) Worked Accomplished: 25% valued at P500,000.00 Less: 3% tax P15,000.00 10% retention 50,000.00 65,000.00 P435,000.00 This Office believes that the procedure established by the Department of National Defense based on consistent rulings of this Office is correct and in accordance with law, hence, the same should be followed. cd Accordingly, under the illustration above only the amount of P900,000.00 represents the gross receipts actually received by the contractor in the first partial payment. Hence, the same should be the basis of the 3% contractor's tax to be withheld by the contractee. However, the 3% tax on the amount of P100,000.00 which corresponds to the 10% retained should be withheld at the time the same is paid to the contractor. acd (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5