Verification of Claims for Refund or Tax Credit Filed by Subcontractors

May 19, 1986 REVENUE MEMORANDUM ORDER NO. 13-86 SUBJECT : Verification of Claims for Refund or Tax Credit Filed by Subcontractors TO : All Internal Revenue Officers and Others Concerned The pertinent provisions of Section 170 of the Tax Code, as amended by P.D. No. 1994 reads as follows: "Sec. 170. Contractors, proprietors, or operators of dockyards, and others . - A contractor's tax of four per cent of the gross receipts is hereby imposed on proprietors or operators of the following business establishments and/or persons engaged in the business of selling or rendering the following services for a fee or compensation. xxx xxx xxx "The term "gross receipts" means all amounts received by the prime or principal contractor as the total contract price, undiminished by any amount paid to the subcontractor under a subcontract arrangement. Any portion of the total contract price which is paid to the subcontractor, shall be excluded from the taxable gross receipts of the subcontractor." Under the above-quoted provision, the prime or principal contractor is liable for the payment of the contractor's tax based on the gross receipts representing the total contract price which includes any amount paid to the subcontractor under a subcontract arrangement. Hence, said amount paid to the subcontractor is excludible from his (the subcontractor) taxable gross receipts. In other words, the subcontractor is not liable for the payment of the contractor's tax on the amount paid to him by the prime or principal contractor under a subcontract arrangement. cd However, there are cases where the subcontractor, despite his exemption from liability under the aforecited provision, pays the contractor's tax, for which reason, he files a claim for refund or tax credit thereof. In the verification of said claim for refund or tax credit, the investigating examiner should ascertain whether or not the contractor's tax has been paid not only by the subcontractor but also by the prime contractor. In the case of the prime contractor, the dates and numbers of the official receipts covering payments of the contractor's tax based on the total contractor price should be ascertained and reported to this Office. In the case of the subcontractor, the portion of the contract price paid by the time contractor as well as the dates and numbers of the official receipts covering payments of the contractor's tax due on said portion should also be ascertained and reported to this Office. However, if the report on the verification shows non-payment of the contractor's tax by the prime contractor based on the total contract price, such non-payment will not prejudice the subcontractor, in which the case, the Appellate Division should immediately process the claim of the subcontractor . With regard to the prime contractor, the Legal Office should take appropriate action not only for the collection of the taxes due from him but also for the criminal prosecution of the parties concerned, if the same is warranted by the evidence. Finally, the investigating examiner should attach in his report copies of the principal contract entered into by the prime contractor as well as the subcontract entered by and between him and the subcontractor who filed a claim for refund or tax credit. This Order shall take effect immediately. (SGD.) BIENVENIDO A. TAN, JR. Commissioner of Internal Revenue TAN - T-5150-J0923-A-4