Whether Retention Money Under LRTA Contract is Subject to 1% Expanded Withholding Tax and to 8.5% Creditable VAT

September 29, 1998 BIR RULING NO. 142-98 RR 6-97, RR 7-95-000-00-142-98 Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Gentlemen : This refers to your letter dated May 14, 1997 requesting, on behalf of Marubeni Corporation (Manila Branch), for opinion as whether or not the retention money under its contract with the Light Rail Transit Authority (LRTA) for the LRT No. 1 Capacity Expansion Project is subject to the 1% expanded withholding tax (EWT) and to the 8.5% creditable value-added tax at the time the progress payments are made; and that the EWT and the creditable VAT shall be deducted only upon actual payment of the said retention money. prcd It appears that the consortium of Marubeni Corporation, ABB Power, Inc. and ABB Daimler Benz Transport Corporation (ADTRANZ) has been awarded the contract for LRT Line 1 Expansion Project; that the contract involves the design, supply of materials and equipment, and the installation services for the said project; that the contract price will be paid through advance payment and through periodic payments; that the advance payment is 5% of the total contract price while the progress payments will then be paid monthly; that the contract provides for a retention (retention money) of 10% of the total contract price; that the 10% retention money is deducted from each progress billing submitted by Marubeni, that the LRTA places the retained amount in a trust fund; that this retention money will be paid upon substantial completion of the project and upon the expiration of the defects liability period; and that during the defects liability period, if there is any corrective work to be done, the expense will be charged against the retention money; that when Marubeni submits its bill to the LRTA, the EWT and creditable VAT is computed net of the retention money of 10%, as shown in this illustration: Gross Amount P466,024.98 Less: 10% Retention Money 46,602.50 Net Amount P419,422.48 Less: 8.5% VAT P32,409.91 1% EWT 3,812.93 36,222.14 Total Amount Claimed P383,199.64 and that however, LRTA's computation is as follows: Gross Amount P466,024.98 Less: 10% Retention Money P46,602.50 8.5% VAT 36,011.02 1% EWT 4,236.60 86,850.12 Total Amount Claimed P379,174.86 ======== Under Section 3 of Revenue Regulations No. 6-85, as last amended by Rev. Regs. No. 2-98, the expanded withholding tax is due on income paid or payable and since in the instant case, the retention money cannot be considered as income or paid at the time of the progress payment, LRTA should not include the amount in the tax base in the computation of the EWT. The EWT should be deducted only upon resolution of the aforestated condition or the actual payment of LRTA of the said retention money to Marubeni. prLL Moreover, Section 9 of Revenue Regions No. 6-97 provides: "SEC. 9. Withholding of Creditable Value-Added Tax . . . . a) The government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall before making payment on account of its purchase of goods from sellers and/or services rendered by contractors which are subject to the VAT imposed under Secs. 100 and 102 of the Code, deduct and withhold the VAT due at the rate of three percent (3%) of the gross payment of the purchase of goods and six percent (6%) on the gross receipts for the services rendered by contractors on every sale or installment payment which shall be creditable against the VAT liability of the sellers or contractors pursuant to RA. No. 7644, as implemented by Revenue Regulations No. 10-93: Provided, That, payment of One Thousand Pesos (P1,000.00) and below per purchase shall not be subject to withholding tax rate. Provided, however, That in the case of Government public works contractors, the withholding tax rate shall be eight and one-half percent (8.5%)." Such being the case, the retention money should not likewise be included in the tax base for purposes of computing the 8.5% creditable VAT, because retention money was not yet paid to Marubeni at the time the progress payments were made. It will be noted that the VAT on sale of services is based on gross receipts pursuant to Section 102 of the Tax Code of 1997 which provides, viz: "SEC. 102. Value-Added Tax . There shall be levied, assessed and collected, a value-added tax equivalent to 10% of gross receipts derived from the sale or exchange of services, including the use or lease of properties. . . ." Sec. 4.102-1 of Revenue Regulations No. 7-95, defines the term "gross receipts" as follows: "Gross receipts refer to the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for services performed or to be performed for another person, excluding VAT. . . ." "Constructive receipt occurs when the money consideration or its equivalent placed at the control of the person who rendered the service without restrictions by the payor." . . . It is clear from the foregoing that the VAT shall be paid only on gross receipts whether actually or constructively received. Since the retention money is not paid at the time the progress payments are made, the said retention money should not be included in the computation of the 8.51% creditable VAT. dctai This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue