Tax Imposed on Contracts Essentially for Redrying and Warehousing

October 19, 1960 BIR RULING NO. 501-60 The Auditor Philippine Virginia Tobacco Administration M a n i l a S i r : Reference is made to your letter dated September 1, 1960 requesting information as to whether or not under the Philippine Virginia Tobacco Administration's contracts with the Philippine Tobacco Flue-curing and Redrying Corporation (PTFC & RC), Consolidated Tobacco Industries of the Philippines (CTIF), and Northern Farmers' Exchange, Inc. (NORFEX), the PVTA should withhold the 3% tax under the provisions of Republic Act No. 1051, as amplified by Revenue Regulations No. V-40. cdtech From PVTA's contracts with said corporation in relation to PVTA's Circular No. 4, the following appears: 1. The PVTA shall purchase Virginia leaf tobacco from the FACOMAS as the redrying plants of said corporations using the facilities of the latter. 2. The PVTA will station the necessary personnel in the redrying plants. 3. The redrying plants will, however, advance the purchase price of the tobacco at the following rates: Grade Price per kilo A P3.60 B 3.00 C 2.50 D 2.00 E 1.50 4. The redrying plants also advance the freight charges and overhead allowances of P.10 for every kilo of leaf tobacco purchased from FACOMAS. 5. After the leaf tobacco have been received and accepted, the redrying plants' responsibility begins. The redrying plants shall then remove the leaf tobacco to so-called transit areas preparatory to redrying. After redrying, the tobacco is packed in hogsheads, warehouse by the redrying plants and serviced by them. The redrying plants' responsibility continues until the hogsheads shall have been withdrawn from their warehouses. 6. After the leaf tobacco is redried and packed in hogsheads, the PVTA pays the redrying plants at the following rates: Grade Price per kilo A P4.07 B 3.44 C 2.92 D 2.40 E 1.88 These rates include the cost of the leaf tobacco, hogsheads, servicing, and other amounts advanced by the redrying plants. 7. For the warehousing and servicing of the leaf tobacco in hogsheads, PVTA pays the redrying plants at the rate of P1.90 per hogshead a month. It is clear from the foregoing, that the contracts entered into by PVTA with the redrying plants are essentially for redrying and warehousing. For the redrying of the flue-cured Virginia leaf tobacco, the redrying plants are constitutes independent contractors. As independent contractors, they are subject to the fixed tax prescribed by section 182 of the Tax Code and to the 3% tax prescribed by section 191 of the same Code on their gross receipts. Their taxable receipts as such independent contractors shall, however, consist of the amount paid them by PVTA for the redrying less all amounts advanced by them for the account of PVTA. As warehouseman, the redrying plants are engaged in another line of business subject also to the fixed and percentage taxes prescribed in the sections of said Code. Since the 3% independent contractor's and warehouseman's tax is based on gross receipts and, therefore, determinable at the time of payment, the tax should be withheld by you pursuant to Republic Act No. 1051, as amplified by Revenue Regulations No. V-40. It appears, however, that some redrying plants are granted tax-exemption under the provisions of Republic Act No. 901. In such case, only 25% of the tax due on their compensation of this year, 50% in 1961 and 90% in 1962 for the redrying of the leaf tobacco should be withheld. In 1963, the full amount of the tax should be withheld. Their compensation from warehousing is however, subject to tax in full and therefore, the full tax should be withheld. lexlib Very truly yours, MELECIO R. DOMINGO Commissioner of Internal Revenue