Case Summary (G.R. No. L-31092)
Revenue Opinions and WHO Certification
In May 1958, the Commissioner of Internal Revenue (CIR) opined that contractor’s gross receipts fell within the Host Agreement exemption but reversed on June 3, 1958, characterizing the 3% contractor’s tax as a direct obligation of the contractor. The WHO then certified in January 1960 that contractors relied on promised exemptions when bidding and urged that Gotamco’s work be tax‐free.
Proceedings Before the Court of Tax Appeals
Upon receipt of a P16,970.40 demand letter (tax plus surcharges), Gotamco appealed to the Court of Tax Appeals (CTA). After trial, the CTA held that the contractor’s tax was an “indirect tax” under the Host Agreement and reversed the CIR’s assessment.
Validity of the Host Agreement
The CIR contended the Host Agreement was void without Senate ratification. The Supreme Court disagreed, distinguishing between formal treaties (requiring two‐thirds Senate concurrence under the 1987 Constitution, Art. VII, Sec. 21) and executive or “less formal” international agreements which bind the Republic upon executive agreement alone. Precedent confirms the Host Agreement’s binding force on Philippine authorities.
Characterization of the Contractor’s Tax
The petitioner argued the 3% contractor’s tax is an excise‐type direct tax on the contractor that cannot be shifted. Adopting the CTA’s reliance on Pollock v. Farmers (1957), the Court held an indirect tax is one initially imposed on a party who is expected to shift its burden. Although payable by Gotamco, the tax would be borne by the WHO through higher contract costs. Thus it qualifies as an indirect tax on the WHO.
Distinction from Philippine Acetylene Co.
Petitioner invoked Philippine Acetylene Co. v. Commissioner (127 Phil. 461) to argue that taxes payable by a contractor are not covered by exemption
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Facts of the Case
- The World Health Organization (WHO), an international organization enjoying privileges and immunities under a Host Agreement with the Philippines (July 22, 1951), decided to construct an office building in Manila.
- WHO’s Host Agreement (Section 11) exempts its assets, income, and properties from all direct and indirect taxes, except charges for public utility services.
- By a supplementary agreement (November 26, 1957), WHO secured importation of construction materials free from duties and taxes and reaffirmed its tax exemption.
- In early 1958 WHO invited bids for the building, instructing contractors to exclude taxes and fees from their proposals.
- John Gotamco & Sons, Inc. (Gotamco) was awarded the contract on February 10, 1958 for an initial price of ₱370,000, which increased to ₱452,544 upon completion.
Legal Framework
- Section 191 of the National Internal Revenue Code imposes a 3% contractor’s tax on the gross receipts of construction contracts.
- The 1951 Host Agreement and the 1957 supplemental agreement together exempt WHO from “all direct and indirect taxes” incidental to its operations and property.
BIR Opinions on Tax Exemption
- May 1958: The Commissioner of Internal Revenue opined that the 3% contractor’s tax is an indirect tax on WHO’s income and thus exempt under the Host Agreement.
- June 3, 1958: The Commissioner reversed his view, ruling that the contractor’s tax is primarily due from the contractor and not covered by WHO’s immunity.
WHO’s Certification
- January 2, 1960: WHO issued a