8% Final Income Tax — Subcontractor

September 17, 1981 BIR RULING NO. 180-81 24-b 000-00 180-81 Messrs. Sycip, Gorres, Velayo & Co. 6760 Ayala Avenue Makati, Metro Manila Attention: Mr . J . U . Ong Tax Division S i r : This refers to your letter dated March 2, 1981 requesting a ruling whether McDermott International Philippines (McDermott) is a subcontractor within the purview of Presidential Decree No. 1354 with respect to its contract for services with Terminal Installation Inc. (TII) in relation to the latter's offshore installation contract with Amoco and with respect to other similar contracts it may hereinafter enter into wherein the principal contractor is a service contractor engaged in petroleum operations in the Philippines. cdta You have represented that AMOCO is a service contractor under the provisions of Presidential Decree No. 87; that it has contracted TII to perform a portion of its exploration work, i.e. the installation of lowlines, bundles, cables, underbuoy hoses and floating production storage and offloading system; and floating production storage and offloading system; and that TII subsequently contracted McDermott specifically for the installation of the floating production storage and offloading system. This work consists of connecting and laying up six anchor chains and the hook-up and tensioning of the six chains to the floating production storage and offloading. In reply, I have the honor to inform you that under Presidential Decree No. 1354, "every sub-contractor, whether domestic or foreign entering into a contract with a service contractor engaged in petroleum operations in the Philippines shall be liable to a final income tax equivalent to eight per cent (8%) of its gross income derived from such contract, such tax to be in lieu of any and all taxes, whether national or local." Applying this provision to the instant case, it would seem that only TII which entered into a contract with a service contractor is considered subcontractor for purposes of Presidential Decree No. 1354 and therefore, McDermott which entered into a contract with a subcontractor cannot be considered as such subcontractor. However, since the contract for services between McDermott, (the secondary subcontractor) and TII (principal sub-contractor) is inherently or necessarily incidental to the exploration and development of petroleum mineral resources by Amoco (the Service Contractor under Presidential Decree No. 87), McDermott may be considered as having the same tax status as TII, and within the parameters of Presidential Decree No. 1354, subject to the terms and conditions provided in said decree as implemented under Revenue Regulations No. 15-78. In view thereof, this Office believes, and so holds, that McDermott falls within the purview of a subcontractor under Presidential Decree No. 1354; hence, the gross income derived from its contract with TII is subject to the 8% final income tax, in lieu of any and all taxes. cdt Very truly yours, RUBEN B. ANCHETA Acting Commissioner