Commissioner of Internal Revenue vs. John Gotamco & Sons, Inc.

and CTA Facts: The Republic of the Philippines and the World Health Organization (WHO) entered into a Host Agreement, which gives the International Organization privileges and immunities. Under the Host Agreement, it provides that, the Organization, its assets, income and other properties shall be exempt from all direct and indirect taxes, however, the Organization will not claim exemption from taxes which are for public utility services. WHO constructed a building for its offices, as well as other United Nations offices in Manila. John Gotamco & Sons, Inc. won the bid and awarded the construction contract. In 1958, WHO received an opinion from the Commissioner of the BIR, saying that the 3% contractors tax is an indirect tax on the assets and income of the WHO, the gross receipts derived by the contractor is exempt from tax in accordance with the Host Agreement. Subsequently, the CIR reversed his opinion and said that the 3% contractors tax is neither a direct nor an indirect tax on the WHO, but a tax primarily due from the contractor. WHO then issued a certification, stating that, contractors were informed that no tax or fees will be levied upon them for their work in connection with the construction of the building, as this will be considered as an indirect tax to the WHO. In 1961, CIR demanded the 3% contractors tax from Gotamco, plus surcharges on the gross receipts. Gotamco appealed to the CTA where it reversed the Commissioners decision. Issue: Whether Gotamco should pay the 3% contractors tax on gross receipts it realized from the construction of the WHO building. Ruling: The SC agrees with the CTA that, contractors tax is an indirect tax. Though it is payable by the contractor, it is the owner of the building that shoulders the burden of the tax because the same is shifted by the contractor to the owner as a matter of self-preservation. In the last analysis, it is the WHO that will pay the tax indirectly through the contractor and it certainly cannot be said that this tax has no bearing upon the WHO. The certification issued by the WHO, sought exemption of the contractor Gotamco from any taxes in connection with the construction of the WHO office building. The 3% contractors tax would be within this category and should be viewed as a form of an indirect tax on the Organization, as the payment thereof or its inclusion in the bid price would have meant an increase in the construction cost of the building.
MANZANO, Maria Angela C.