Deductibility and Withholding of the 4% Contractor's Tax and 1% Withholding Tax

December 15, 1988 BIR RULING NO. 581-88 102 (a); 51 000-00 581-88 Gentlemen : This refers to your letter dated November 4, 1988 stating that you had a contract with the Davao Light and Power Co., Inc. on July 27, 1987 whereby the latter will provide a primary power distribution system for the Davao RIFT/RFTC Complex under the Fishery Training Project, a World Bank-assisted Project implemented by that Agency; that the status of the installation of the project as of today is around 85% complete and you have processed two (2) progress billings whereby 4% withholding tax and 1% withholding tax have been withheld out of the gross collection of Davao Light and Power Co., Inc; and that the latter is contesting the deduction on the ground that it is already paying 2% franchise tax on its gross revenue pursuant to Section 10 of Act No. 3636, its franchise. Based on the foregoing, you now request clarification as to whether you should deduct and withhold the 4% contractor's tax and 1% withholding tax before making payments to Davao Light and Power Co., Inc. In reply, please be informed that since the said project was not completed as of December 31, 1987, the receipts derived by the contractor (Davao Light and Power Co., Inc.) starting January 1, 1988 shall be subject to 10% value-added tax under Section 102(a) of the Tax Code, as amended by E.O. No. 273 and not to the 4% contractor's tax under then Section 170 of the Tax Code. However, you are not required to deduct and withhold the 10% value-added tax on your money payments to Davao Light and Power Co., Inc. because the value-added tax is not subject to the withholding provisions of R.A. No. 1051 and its implementing regulations. (Paragraph 1, Revenue Memorandum Circular No. 18-88) The contention of taxpayer that it is not liable for any tax deduction for the job undertaken because it is already paying a 2% franchise tax on its gross receipts pursuant to its franchise is untenable. Upon the effectivity of Executive Order No. 72 on Feb. 10, 1987, franchise holders became subject to income tax levied under Title II of the Tax Code. Such being the case, the 1% expanded withholding tax shall be deducted and withheld by you from gross payments to Davao Light and Power Co., Inc., pursuant to Section 1(e) of Revenue Regulations No. 6-85 otherwise known as the Revised and Consolidated Expanded Withholding Tax Regulations. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner