Final Target Estimate for the Construction of the Binga Hydroelectric Project

April 19,1960 BIR RULING NO. 175-60 Messrs. Sycip, Gorres, Velayo & Co. Certified Public Accountants P.O. Box 589, Manila Gentlemen : Reference is made to your letter of the 7th instant, requesting confirmation of your opinion that under the following circumstances, your client, Widmark & Platzer, AB, may file its income tax return after such time as the final target estimate for the construction of the Binga Hydroelectric Project is determined by the National Power Corporation. With said letter you submitted a certificate from the National Power Corporation attesting to the fact that said final target estimate is still pending determination by that Office. cdtech "Our client, Widmark & Platzer, AB, which is a sub-contractor of the Philippine Engineers' Syndicate, Inc., has a contract with the National Power Corporation for the construction of the Binga Hydroelectric Project. Its contract fee is based on the so-called 'target estimate' contract. Under this contract, our client gets a fee of 10% of the target estimate if the actual cost of work will be the same as the target estimate. If the actual cost of the work upon completion is less than the target estimate, our client gets a bonus of at least 50% of the savings, aside from the 10% fee. However, if the actual cost is more than the target estimate, 50% of the difference between the actual cost and the target estimate is deducted from the 10% fee as penalty. In this case, our client will not be entitled to any bonus. Under the contract with the National Power Corporation, the maximum fee and bonus which our client will receive is 14% and the minimum fee is 4%. Furthermore, for the construction of the Binga Hydroelectric Project, Widmark & Platzer, AB can get an advance fee up to 9% based on the adjusted target estimate. "In the later part of 1959, the construction of the Binga Hydroelectric Project was completed. However, the final target estimate upon which the correct fee of the contractors is to be based is still being determined and computed by the National Power Corporation. As of the present, no final settlement of the figures upon which the contract fee is to be based has as yet been ascertained by the National Power Corporation "In the view of the foregoing facts, our client, Widmark & Platzer, AB which has been filing its income tax return under the completed contract method of accounting, has requested our opinion on whether or not it has to file its income tax return when the Binga Hydroelectric Project was completed sometime in the later part of 1959 or until such time as the final target estimate is determined by the National Power Corporation. "We believe that inasmuch as the fee and such other compensation of the contractors, Philippine Engineers' Syndicate, Inc. and Widmark & Platzer, AB, cannot be established unless and until after the adjusted target estimate is determined and finally ascertained by the National Power Corporation, our client cannot correctly reflect is income from the project in the year of its completion but only till after the final settlement of the figures of its construction is announced by the National Power Corporation, there being no way of determining the amount of profit or loss on the aforesaid project prior to the determination of final target estimate. However, before advising our client, we would like to have your confirmation on this matter," In answer thereto, I have the honor to inform you that, based on the aforequoted facts, this Office shares the view that your client may file its return after such time as the final target estimate is determined by the National Power Corporation, but within the period prescribed by section 46(b) of the Tax Code, as amended. Very truly yours, (SGD.) MELECIO R. DOMINGO Commissioner of Internal Revenue