Bureau of Local Government Finance Opinion

August 10, 1998 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 1st Indorsement Respectfully returned, thru the Municipal Treasurer, San Manuel, Pangasinan, to the Sangguniang Bayan, same municipality. This refers to the subjoined letters both dated July 24, 1998 of Councilor Bonie I. Apilado of that Body requesting clarifications regarding the payment of the tax on contractors pursuant to Section 143 of the Local Government Code (LGC) of 1991. Said request is being made in view of the on-going construction of the San Roque Multi-Purpose Dam under the BOT scheme in the said municipality. It is alleged that some of the contractors have not complied with regard to the payment of taxes, fees and charges being imposed by said municipality, hence, the following queries: "1. Can the municipality of San Manuel enforce tax on Contractors and Sub-Contractors as a result of consortium of three different companies on the build operate transfer Multi-Purpose Dam project in its respective area of jurisdiction?' "2. If the municipality can, how is the manner of collection, is it quarterly, yearly, etc.?' "3. What is the basis in determining the said tax, is it on their gross sales, gross receipts, net income or capitalization?" A. On Principal Contractors: "1. Since the principal contractor has also their principal office (branch), what would be the basis of computation of their business taxes that would go to the municipality?' "2. For purposes of computation, what does capitalization or gross sales/receipts mean on contractors having his principal business and branching out to other places?" B. On Sub-Contractors: "1. Because the law is silent on sub-contractors, are taxes being levied to main contractors applicable to sub-contractors?' "2. Some of the sub-contractors claimed that the principal contractor will be responsible for the payment of their business taxes, is this legal?' "3. If question cited in (2) is applicable, what then would be the other charges that can be collected from them?" TSAHIa On Query No. 1.: The municipality may impose a business tax on contractors and independent contractors provided that an ordinance has been enacted for the purpose. On Query No. 2.: The tax period for all local taxes, fees and charges shall be the calendar year so that such impositions become due and collectible on the first (1st) day of January of each year and are required to be paid within the first twenty (20) days of January. However, certain taxes like the business taxes may also be paid by quarterly installments on or before the first twenty (20) days of each quarter of the year. On Query No. 3.: The tax shall be based on the gross receipts for the preceding year. A. Oil Principal Contractor : On Query No. 1.: Section 5(b)(1) and (2) of Local Finance Circular (LFC) No. 3-95, quoted hereunder, shall apply: "Section 5. Situs of Tax . "xxx xxx xxx "(b) For purposes of collection of the tax, the following rules shall apply: "(1) All gross receipts realized from domestic projects or contracts undertaken by the branch office shall be recorded in the said branch office and the tax thereon shall be payable to the city or municipality where the said branch is located; "(2) In cases where there is no branch office, the gross receipts from domestic projects or contracts shall be recorded in the Head/Principal Office and the same shall be allocated as follows: "(1) Thirty percent (30%) of the gross receipts shall be taxable by the city or municipality where the principal office is located; and "(ii) Seventy percent (70%) of the gross receipts shall be taxable by the city or municipality where the project office is located. "xxx xxx xxx." On Query No. 2.: The term "gross receipts", as applied to contractors, would be the total amount of service fees, including the amount charged or materials (parts of the things to be constructed) supplied with the service, and advance payments or deposits actually or constructively received during the taxable year. Such part of the contract price or those payments or deposits which are not actually or constructively received by the contractor during the taxable year and materials or equipment that do not form part of the things to be constructed although they were supplied during the said year shall be excluded from the tax base. B. On Sub-Contractors.: On Query No. 1.: It may be stated that the taxable gross receipts shall be the amounts received by the principal contractor as the total contract price less the amount paid to a sub-contractor under a subcontract agreement, if there is any. The said sub-contractor, shall become an independent contractor and shall also be subject to the business tax imposed under Section 143(e) of the LGC as implemented by a duly-enacted ordinance of the municipality. caIDSH On Query No. 2.: It is pointed out that the LGC specifically provides that a local government unit may impose a business tax based on the gross sales and/or receipts of a business entity for the preceding year. Hence, a sub-contractor shall be subject to, or liable to pay the business tax on contractors on the basis of the cost of the portion of the project sub-contracted. On Query No. 3.: Both the contractor and the sub-contractor shall be subject to pay the Mayor's permit fee and other regulatory fees imposed in existing tax ordinances of the municipality. It is hoped that this will help clarify matters. (SGD.) ANGELINA M. MAGSINO Deputy Executive Director Officer-in-Charge