Request for Confirmation on Authority to Impose and Collect Local Business Tax on Gross Receipt Realized by a Specialty Contractor from its Overseas Construction Projects

May 16, 2017 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Anthony Mark A. Gutierrez Partner, Gatmaytan Yap Patacsil Gutierrez & Protacio 30/F 88 Corporate Center Sedeo corner Valero Streets Salcedo Village, Makati City SUBJECT : Request for Confirmation on Authority to Impose and Collect Local Business Tax on Gross Receipt Realized by a Specialty Contractor from its Overseas Construction Projects Dear Atty. Gutierrez : This refers to your letter dated 21 April 2017, requesting for confirmation, as counsel for Thermaprime Drilling Corporation ('Thermaprime,' for brevity),on the issue of whether or not cities and municipalities have no authority to impose and collect local business tax (LBT) on gross receipts realized by a specialty contractor from its overseas construction projects. HTcADC Representations were made that Thermaprime is a corporation whose principal classification is for well drilling work. It is duly organized and existing under Philippine law, with principal office at Ortigas Avenue, Pasig City. Thermaprime has no branches or sales outlets, but maintains projects offices in different localities in the Philippines. It is also represented that, Thermaprime was registered as a Specialty Contractor at the Philippine Overseas Construction Board. As part of its business expansion plan, Thermaprime also intends to offer its well drilling and construction services to clients located overseas. To support the above requests, the Counsel for Thermaprime cited the following provisions of DOF Local Finance Circular (LFC) and BLGF Opinion: 1. Section 11 (c) 1 of Presidential Decree No. 1167 providing for the power of POCB to determine from among the interested construction contractors who will be allowed to bid for overseas projects; 2. Section 1 2 of DOF LFC No. 03-95 providing the guidelines that will govern the levy of business taxes on construction contractors such as specialty contractor; 3. Section 5 (b) (4) of the DOF LFC No. 03-95 as, "In case of overseas construction projects, the construction contractor shall declare separately the gross receipts realized therefrom, which shall not be subject to the business tax" ; CAIHTE 4. Section 9 (e) 3 of Republic Act No. 4566 providing for the definition of specialty contractor; and 5. DOF letter addressed to Mr. Ferdinand V. Villafuerte, President of GULF-ASIA International Corporation, dated 30 May 2005, thru this Bureau, providing that the contract for the service which were totally consummated and perfected outside the Philippines, local government unit (LGU) may not impose the business tax on the earnings from contracts done, performed or executed abroad by GULF-ASIA. Accordingly, this Bureau holds that the abovementioned policies and opinions are still in force and effect, unless modified or rescinded accordingly by the same or higher competent authority. To reiterate, as stated in the DOF letter addressed to Mr. Ferdinand V. Villafuerte, President of GULF-ASIA International Corporation, dated 30 May 2005, thru this Bureau, the above position was made in view of various rulings of the Supreme Court and the Court of Tax Appeals wherein it has been consistently held that gross receipts must be realized from services rendered within the jurisdiction of the local government imposing the tax .Simply stated, if the services were performed beyond the territorial jurisdiction of the taxing authority the power to tax may not be exercised . It is a well-established principle of taxation that the power to impose a privilege or excise tax upon the exercise or enjoyment of a right or privilege is limited to the territorial jurisdiction of the sovereign and a state is without jurisdiction to impose a tax on business unless activities which are the subject of the tax are carried on within its territorial limits, irrespective of the place where the party doing business has his residence . As aptly stated in existing jurisprudence, "all subjects over which the sovereign power of a state extends are objects of taxation but those over which it does not extend are upon the soundest principle, exempt from taxation." 4 We hope that we have provided clarity on the matter. Very truly yours, (SGD.) NIO RAYMOND B. ALVINA OIC Executive Director Footnotes 1. Section 11. Powers and Functions . The Board shall exercise by itself or through existing agencies, the following powers and functions: (c) Determine, with the assistance of the representative of the private construction industry and the Department of Public Works, Transportation and Communication from among the interested construction contractors those who will be allowed to bid for overseas projects. 2. Section 1. Coverage . In order to ensure the uniform application by cities and municipalities of the provisions of Sections 143 (e) and 151 of the LGC and Articles 232 (e) and 237 of its IRR, the guidelines herein prescribed shall govern the levy of business taxes on construction contractors such as, but not limited to general engineering, general building and specialty contractors as defined under Republic Act 4566 (as amended), known as the Contractors Licensing Law and other applicable laws. 3. Section 9. Definition of terms . As used in this Act: (e) A "specialty contractor" is a person whose operations pertain to the performance of construction work requiring special skill and whose principal contracting business involves the use of specialized building trades or crafts. 4. Curry v. Mc Canless ,307 U.S. 357, 83 L.Ed. 1339, 59 s. Ct. 900, 123 ALR 162.