VAT Ruling No. 038-00

October 16, 2000 VAT RULING NO. 038-00 108 (A) (8) 10-99 Mr. Alfredo N. Macapugay City Engineer Quezon City Dear Engineer Macapugay : This refers to your letter dated 19 June 2000 regarding your query on the application of the Value Added Tax with respect to the cost estimates submitted by contractors to your Office, particularly regarding Overhead, Contingencies and Miscellaneous (OCM) of Direct Cost and also on whether the Contractor's Profit is also subjected to the said tax. In reply thereto, please be informed that overhead, contingencies and miscellaneous (OCM) of direct cost and the contractor's profit all fall within the meaning, of gross receipts subject to the 10% value-added tax imposed under Section 108(A) of the Tax Code of 1997 which provides that: " There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of service, including the use or lease of properties. " DSacAE The term "Gross Receipts" means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payment actually or constructively received during the taxable quarter for the services performed or to be performed for another persons, excluding the value-added tax (Sec. 108(A)(8), Tax Code of 1997). Hence, all items falling under and/or to be billed as part of the contract amount such as the Overhead, Contingencies and Miscellaneous (OCM) Of direct cost as well as the contractor's profit are subject to VAT and should be properly recognized as such in the "cost estimate". However, it should be understood that when such "cost estimate" eventually ripens into actual billing by the VAT-registered supplier, such billing shall be VAT-inclusive (Revenue Regulations 8-99), meaning that the VAT shall not be indicated separately. Finally, it should be noted that VAT is an indirect tax. As such, it can be shifted to the purchasers of goods and services. In your case, your contractors may pass on the input VAT on their own purchase of goods and services. Once shifted, the VAT forms part of the cost of goods and services purchased. (Phil. Acetylene Co. Vs. CIR., CTA Case No. 708, Sept. 17, 1965). It is settled that the Quezon City Government is subject to value-added tax since like other government agencies, it does not enjoy indirect tax exemption, and considering further that the sale of VAT-taxable service to the government is not one of the VAT-exempt transactions contemplated under Section 109 of the Tax Code. (VAT Ruling No. 10-99 dated June 19, 1999). Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group