October 10, 1978 REVENUE REGULATIONS NO. _/5-7/ SUBJECT: Regulations governing( taxation of sub-contractors») and alien individuals ‘émployed-py”Servicecon=— tractors and sub-contractors engaged in the CBetroieun operations. th the Philippines under residential Decree No. 87, as provided for under Presidential Decree No. 1354. TO All Internal Revenue Officers and others concerned. Pursuant to the provisions of Section 326, in relatton 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 promul~ gated to govern the manner of taxation of sub-contractors and alten individuals employed by service contractors and sub- contractors 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. . 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 Pre- sidential 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 re~ cetved 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. Reimburseable expenditures made by the sub-contractor on behalf of the service contractor will not be considered as income. 379e) "Gross compensstion" means the total sslaries, wages, annuities, compensations, remuneratians and omolunents received by an alien individual froma service - . contractor or sub-contractor for setviced rené"ved. £). “Administrative contrac entered into by the service contractor "entities or individuals relating vo Ux: adainisteative operation of the service contractor's local. oftice in + the Philippines. Examples of adminis ace those coyering janitorial and lease Of office space, staff houwes, of office equipment, maintenance service + conteacts of similar nature. SECTION 2. - Rates of incom tax = rates of incane tax to be imposed, whic all axes, whether national or lecal, she «) Gross income earned contractor, whether domestic or result of a contract entered into witi the contractor engaged in petroleum a, cats be subject toa final inoom tax ct c.gie (). b) Gross compensation zee wal ixy every’ ron resident alien individual for services conieres Wa service contractor or sub-contca x petroletn operations shal” be subj-ct oo 4 ine. income tax of fifteen per cent (15% ©) Any income earned by 3 saircontractor of aon resident alien individual from ali other source: within the Philippines shali be subject vw» the requiar itcone tax imposed under the National Interaal Revenue Code, SECTION 4. - Manner of oomputatio. Gross incom: of a sub-contractor and mic of a non-resident alien individual, for p.cposes of Section 3, paragraphas (a) and (b) hereof, shal be his gros income undiminished by exclusions or deductions. In the event such amount is paid in foreign ours omey, sane shall be converted to Philippine pesos at the :cevailing Fate of excharwe at the time of paymont SUCTION 5. - Manner of filing rows very service contractor or domestic cul a xeturn of the gross income or gross co withholding tix as computed in Section 4 [nereol, within twenty~ Five (25) day:, alter the endiof each cauutndar quartes, and the withholding (cx due thereon paid at the dime the rewucn is filed, to the Commissioner of Internal Revenue, Revenue Regional Direc tor, Revenue District Officer or the Collection agent of the City or Municipality where the service coptcactor's or the conestic sub-contractor's main leeal ciiibe is located and where its books of accounts are kept, in accurdgnce with ti pcovisiens of Section 54 Of the National Internal kcvenue Gxde. Vor Uhie Purpose, BIR Form No. 1743-B shall. be usal. Je :In the case of alien individuals employed by a foreign sub- contractor, the latter shal] furnish the service contractor a Vist 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 1s made to the sub-contractor. SECTION 6. - Registration of contracts entered into with sub- contractors. -" Every service contractor shall register with the eau of Energy Developnent- a) All existing contracts; and b) Any and all contracts to:be entered into re- Tating 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 administra~ tive 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 1s located and where its books of accounts are kept to be made readily available for inspect’ SECTION 7. ~ Allowability of cost of sub-contract as part of reinburseable operating expensis. = The cost 0 subesntraees sha) be considered as part of the reimburseable 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) “AT1 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 @. ~ 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 admi- nistrative penalties incident to delinquency or deficiency pres- cribed 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. - A11 regulations, rulings, orders, or portions thereof which are inconsistent. with the pro= visions of these regulations, are hereby revoked. 381 4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 con- tractors and sub-contractors shall be effective upon approval of these regulations. CESAR VIRATA Minister of Finance RECOMMENDED BY: Yusef U Aone Actiytg Commissioner