Bureau of Local Government Finance Opinion

January 21, 2011 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mr. Efren M. Canlas Chairman Hilmarc's Construction Corporation 1835 E. Rodriguez Sr. Avenue Quezon City Sir : This refers to your letter dated January 12, 2011 requesting in behalf of your company, HILMARC'S CONSTRUCTION CORPORATION (HCC) a confirmatory ruling in connection with the Revised Notice of Assessment from Makati City demanding the payment in the amount of P5,464,925.18 representing alleged deficiency taxes for the period 2006 to 2008. It is claimed that in a letter dated January 4, 2011, the request for the deduction from HCC's gross receipts of certain amounts paid to its sub-contractors was denied on the ground that said sub-contractors had allegedly not secured business permits in Makati while performing projects for the company. It is your contention that HCC cannot be held responsible for the neglect or omission of taxpayers as you are not under authority to scrutinize their respective dealings with Makati City. It is contended further that as a private entity, your duty is only limited to performing your obligation/s as a taxpayer to local government units wherein you have projects. Hence, it is opined that the sub-contractor's failure to secure business permits from Makati City attaches a liability to the said sub-contractors, but not to the company. Citing Section 130 (c) of the Local Government Code (LGC) which explicitly provides that "collection of local taxes, fees, charges and other impositions shall in no case be let to any private person", it is your position that HCC should not and cannot be held liable for any unpaid taxes, fees or charges of your sub-contractors as the duty to collect the same is vested with Makati City. Finally, it is your contention that HCC's business tax payments should be based on gross receipts derived from the project less the amounts paid to sub-contractors pursuant to the provisions of Section 3 of DOF Local Finance Circular No. 3-95. aDHCEA For a clearer understanding, Section 3 of said Circular is quoted as follows: SECTION 3. Rate and Manner of Imposition. "(a) . . . "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 arrangement, if there is any. The said sub-contractor, however, shall also be subject to the business tax imposed herein. "xxx xxx xxx." On the basis of the above representations, it appears that your position that the business tax payments should be based on gross receipts derived from the project less the amounts paid to sub-contractors is in full accord with the aforequoted provisions. HCC should be treated as a separate and distinct juridical entity. HCC should not be made to assume the burden of paying the business tax on the cost of the portion of the project sub-contracted, which the sub-contractors failed to settle with the City of Makati. Accordingly, the Revised Notice of Assessment dated January 4, 2011 demanding the payment in the amount of P5,464,925.18 as alleged deficiency taxes for the period 2006 to 2008 shall not apply to HCC for lack of legal basis. We hope that this will help clarify matters. Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA, CESO III Executive Director