December 2011 Philippine Supreme Court Decisions on Tax Laws

National Internal Revenue Code; Value Added Tax; Civil Code. LVM Construction was awarded the construction contract with DPWH. LVM as the contractor entered into a Sub-Contractor Agreement with a Joint Venture as sub-contractor. As the entity which directly dealt with the government insofar as the main contract was concerned, LVM was itself required by law to pay the 8.5% VAT which was withheld by the DPWH. A contract constitutes the law between the parties who are, therefore, bound by its stipulations which, when couched in clear and plain language, should be applied according to their literal tenor. That there was no agreement regarding the offsetting urged by LVM may likewise be readily gleaned from the parties’ contemporaneous and subsequent acts which are given primordial consideration in determining their intention.  In the absence of any stipulation regarding the Joint Venture’s sharing in the VAT deducted and withheld by the DPWH from its payment on the main contract, LVM has no basis in offsetting the amounts of said tax from the retention still in its possession.  LVM, as Contractor for the Project, was liable for the 8.5% VAT which was withheld by the DPWH from its payments, pursuant to Section 114 (C) of the NIRC.  Absent any agreement to that effect, LVM cannot deduct the amounts thus withheld from the sums it still owed the Joint Venture which, as Sub-Contractor of 30% of the Project, had its own liability for 10% VAT insofar as the sums paid for the sub-contracted works were concerned.   Although the burden to pay an indirect tax like VAT can, admittedly, be passed on to the purchaser of the goods or services, it bears emphasizing that the liability to pay the same remains with the manufacturer or seller like LVM and the Joint Venture.  In the same manner that LVM is liable for the VAT due on the payments made by the DPWH pursuant to the contract on the Project, the Joint Venture is, consequently, liable for the VAT due on the payments made by LVM pursuant to the parties’ Sub-Contract. LVM Construction Corporation vs. F.T. Sanchez/SOCOR/KIMWA (Joint Venture), G.R. No. 181961, December 5, 2011.

(Caren thanks Lui Manalaysay for assisting in the preparation of this post.)