Kind and Rate of Tax/es Which DENR Shall Withhold on Billings to Reforestation Contractors

April 1, 1997 BIR RULING NO. 031-97 RR 10-93 RR 6-85 000-00 031-97 Department of Environment and Natural Resources Visayas Avenue, Diliman Quezon City Attention: Ms . Evangeline C . Crusado Gentlemen : This refers to your letter dated October 15, 1996 stating that the Department of Environment and Natural Resources (DENR) is currently implementing its Second Forestry Sector Project which aims to restore the country's forest cover and ecological balance as well as to provide livelihood opportunities for upland dwellers; that the Asian Development Bank (ADB) and the Overseas Economic Cooperation Fund (OECF) extended a total loan of P175 Million to finance the program; that the project is dealing with two (2) types of contractors, the Non-Government Organizations (NGO's) who are contracted to do community organizing in the project sites and the People's Organization-Upland Communities (PO-UC's) who are being tapped to do the reforestation; that the financial system of the project requires a new method of withdrawing loan fund through the imprest fund system wherein which the project is given a certain limit of working fund to be replenished from time to time upon submission of liquidation reports; and that your liquidation reports are frequently being questioned by ADB and OECF about the different rates of taxes being applied from one region to another which significantly contributes to the delay in the project implementation because of the delay in the release of the working fund replenishment. Based on the foregoing, you are requesting clarification regarding the kind and rate of tax/es which DENR shall withhold on billings to the said reforestation contractors. In reply, please be informed that pursuant to Section 4.103-1 (B) (K) of Revenue Regulations No. 7-95, as amended by Revenue Regulations No. 6-97, implementing Section 103 of the Tax Code, as amended by R.A. No. 7716 as further amended by R.A. No. 8241, services by agricultural contract growers are exempt from VAT. The term "agricultural contract growers" as defined therein shall also include reforestation contractors pursuant to the Government Reforestation Program. Such being the case, since DENR's reforestation contract growers/contractors are exempt from the 10% value-added tax, your income payments to said contractors (NGO's and PO-UC's) for sale of services shall not be subject to the withholding of 6% creditable value-added tax prescribed by Republic Act No. 7649 as implemented by Revenue Regulations No. 10-93. Moreover, this Office has consistently ruled that only income payments to persons enumerated in Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, are subject to the expanded withholding tax. Considering that payments to NGO's and PO-UC's are not among those specified in said regulations, your income payments to the said contractors are not, therefore, subject to the creditable expanded withholding tax. aisadc Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue