Bureau of Local Government Finance Opinion

September 26, 2002 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 1st Indorsement Respectfully returned to the Municipal Treasurer, Pili, Camarines Sur, her letter dated August 09, 2002, requesting opinion relative to the collection of business tax on contractors on the following issues: What would be the basis of computation if the project were a straight contract? Meaning, labor and materials supplied at the same time by the contractor. For those projects that are exempted from the real property taxes, say churches and school buildings, are they, likewise, exempted from the contractor's tax although contracted by a private contractor? What if it involves a huge amount of construction cost? If the contractor is only for the administration and technical supervision of a project, is a contractor covered by the said business tax? If so, what would be the basis? cHDEaC Either on government or private construction, what would be the basis then? Is it from the total cost of the project or from the cost of labor only? Could we collect the said contractor's tax at the same time of payment of the building permit for the reason that, say, the duration of the project is only eight (8) months, and after the period, the contractor would leave because they have no office or business in the municipality, whatsoever? Issue No. 1.: Section 2 (e) of Local Finance Circular No. 3-95, prescribing the guidelines to supplement Article 232 (e) of the Implementing Rules and Regulations (IRR) implementing Section 143 (e) of the Local Government Code (LGC) of 1991, as it applies to construction contractor provides as follows: "Section 2. Definition of Terms. As used herein, the term "(a) . . . "(e) Gross Sales or Receipts shall include the total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged or materials with the services and deposits or advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person excluding discounts if determinable at the time of sales, sales return excise tax and value-added tax (VAT) paid by the taxpayer. ITaESD "xxx xxx xxx." It is very clear from the aforequoted provision of the law that gross sales or receipts would mean the actual or construction receipts without deducting the cost of labor, material and other maintenance expenses attributed to the operation of the business. In relation with the above provision, the tax on multi-year projects undertaken by general engineering, general builders, and specialty contractors shall initially be based on the total contract price, payable in equal annual installments within the project term. Upon completion of the project, the taxes shall be recomputed on the basis of the gross receipts of the preceding calendar year and the deficiency tax, if there be any, shall be collected or the excess tax payments refunded. Issue No. 2.: It may be mentioned that the tax on contractors is NOT imposed on the project itself but on the business of constructing the project, irrespective of whether those are exempt from the real property taxes. ACcHIa Issue No. 3.: Under Section 131 (h) of the LGC, "Contractor shall include persons, natural or juridical, not subject to professional tax under Section 139 of the Code, whose activity consists respectively of the sale of all kinds of services for a fee, regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractor or his employees. On the basis of the aforequoted provision of the law, a contract for the administration and technical supervision of a project shall be subject to the business tax imposed on contractors based on the contract price. Issue No. 4.: It may be noted from the aforequoted definition that there is no distinction between contractors of government projects and those of non-government projects. Thus, the term "contractor" shall include contractors of government infrastructure projects. The business tax shall be computed on the basis of the gross sales/receipts as defined above without any deductions. Issue No. 5.: In cases of projects completed within the year, the tax shall be based upon the contract price and shall be paid upon the issuance of the Mayor's Permit. ICHDca It bears emphasis however that the above stipulation should be provided under a duly-enacted tax ordinance. Be guided accordingly. (SGD.) MA. PRESENTACION R. MONTESA Executive Director