Regulations Governing Taxation of Sub-contractors and Alien Individuals Employed by Service Contractors Engaged in Petroleum Operations

October 10, 1978 REVENUE REGULATIONS NO. 15-78 SUBJECT : Regulations governing taxation of sub-contractors and alien individuals employed by service contractors and sub-contractors engaged in the Petroleum operations in the Philippines under Presidential Decree No. 8 7, as provided for under Presidential Decree No. 1 354 TO : All Internal Revenue Officers and others concerned Pursuant to the provisions of Section 326, in relation to Section 4 of the National Internal Revenue Code of 1977, as amended, the following regulations are hereby promulgated: SECTION 1. Scope. These regulations are hereby promulgated to govern the manner of taxation of sub-contractors and alien individuals employed by service contractors and subcontractors engaged in the petroleum operations under Presidential Decree No. 87, as provided for under Presidential Decree No. 1354. These regulations shall be known as Revenue Regulations No. 15-78. SECTION 2. Definition of Terms. For purposes of these regulations, unless the context otherwise indicates, the following definitions of terms are hereby adopted: a) "Service contractor" means the contractor in a service contract whether acting alone or in consortium with others, engaged in petroleum operations under Presidential Decree No. 87. b) "Subcontractor" means a foreign or domestic entity engaged by a service contractor for a specific undertaking in pursuance of a service contract under Presidential Decree No. 87, excluding administrative contracts defined under sub-paragraph (f) hereof. c) "Alien individuals" refer to individuals who are neither citizens nor residents of the Philippines but who are employed and assigned in the Philippines by service contractors or by sub-contractors engaged in petroleum operations under Presidential Decree No. 87. d) "Gross income" means all income earned or received as a result of any Contract wherever executed by the sub-contractor with the service contractor engaged in petroleum operations under Presidential Decree No. 87. Reimbursable expenditures made by the sub-contractor on behalf of the service contractor will not be considered as income. e) "Gross compensation" means the total salaries, wages, annuities, compensations, remunerations and emoluments received by an alien individual from a service contractor or sub-contractor for services rendered. f) "Administrative contracts" refer to contracts entered into by the service contractor with domestic entities or individuals relating to the administrative operation of the service contractor's local office in the Philippines. Example of administrative contracts are those covering janitorial and messengerial services, lease of office space, staff houses, office cars and office equipment, maintenance service thereof and other contracts of similar nature. SECTION 3. Rates of income tax to be imposed. The rates of income tax to be imposed, which shall be in lieu of all taxes, whether national or local, are as follows: a) Gross income earned by every subcontractor, whether domestic or foreign, as a result of a contract entered into with the service contractor engaged in petroleum operations, shall be subject to a final income tax of eight per cent (8%). b) Gross compensation received by every non-resident alien individual for services rendered to a service contractor or sub-contractor engaged in petroleum operations shall be subject to a final income tax of fifteen per cent (15%). c) Any income earned by a sub-contractor or non-resident alien individual from all other sources within the Philippines shall be subject to the regular income tax imposed under the National Internal Revenue Code. SECTION 4. Manner of computation of taxable income. Gross income of a sub-contractor and the gross compensation of a non-resident alien individual, for purposes of Section 3, paragraphs (a) and (b) hereof, shall be his gross income undiminished by exclusions or deductions. In the event such amount is paid in foreign currency, same shall first be converted to Philippine pesos at the prevailing rate of exchange at the time of payment. SECTION 5. Manner of filing return and payment of taxes. Every service contractor or domestic sub-contractor shall file a return of the gross income or gross compensation subject to withholding tax as computed in Section 4 hereof, within twenty-five (25) days after the end of each calendar quarter, and the withholding tax due thereon paid at the time the return is filed, to the Commissioner of Internal Revenue, Revenue Regional Director, Revenue District Officer or the Collection Agent of the City or Municipality where the service contractor's or the domestic sub-contractor's main local office is located and where its books of accounts are kept, in accordance with the provisions of Section 54 of the National Internal Revenue Code. For this purpose, BIR Form No. 1743-B shall be used. In the case of alien individuals employed by a foreign subcontractor, the latter shall furnish the service contractor a list of the alien individuals employed by it with the corresponding amount of gross compensation due them during the quarter, from which the service contractor shall likewise be obligated to deduct, withhold, and remit the corresponding 15% final withholding tax in the same manner as in the preceding paragraph, before any payment is made to the sub-contractor. SECTION 6. Registration of contracts entered into with sub-contractors. Every service contractor shall register with the Bureau of Energy Development a) All existing contracts; and b) Any and all contracts to be entered into relating to oil operations between the service contractor and the sub-contractor engaged in petroleum operations. Administrative contracts as defined in Section 2(f) hereof need not be registered with the Bureau of Energy Development. However, a copy of each administrative contract shall nonetheless be furnished said Office for records purposes. Copy of such registered contract shall be kept in the place where the service contractor's main local office is located and where its books of accounts are kept to be made readily available for inspection. SECTION 7. Allowability of cost of sub-contract as part of Reimbursable operating expenses. The cost of subcontracts shall be considered as part of the Reimbursable operating expenses of the service contractor under Presidential Decree No. 87 only if it is shown that a) The contract has been properly registered with the Bureau of Energy Development; and b) All income taxes that should be withheld under P.D. No. 1354 have been withheld and paid in accordance with the provisions of Sections 53 and 54 of the National Internal Revenue Code. SECTION 8. Penalties. In addition to civil and criminal penalties for violations of the Income Tax Laws as provided for under Sections 73, 74 and 337 of the Tax Code of 1977, the administrative penalties to delinquency or deficiency prescribed in Sections 51 and 72 of the Tax Code of 1977 shall be imposed. These penalties shall be collected at the same time, in the same manner and as part of the tax. SECTION 9. Repealing Clause. All regulations, rulings, orders, or portions thereof which are inconsistent with the provisions of these regulations, are hereby revoked. SECTION 10. Effectivity. These regulations shall apply to income earned on service contracts in effect or entered into on or after April 21, 1978. The withholding of taxes due from sub-contractors and alien individuals employed by service contractors and sub-contractors shall be effective upon approval of these regulations. CESAR VIRATA Minister of Finance Recommended by: EFREN I. PLANA Acting Commissioner