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

A contractor's tax imposed on a builder but ultimately shifted to the property owner through the construction price is an "indirect tax" on the owner within the meaning of a host agreement exempting an international organization from all direct and indirect taxes, and a host agreement entered into by the Chief Executive is valid and binding without Senate ratification as a less formal international agreement.

The World Health Organization (WHO) is an international organization maintaining a regional office in Manila. On July 22, 1951, the Republic of the Philippines and the WHO entered into a Host Agreement defining the privileges and immunities of the Organization, including exemption from all direct and indirect taxes under Section 11, with the understanding that the WHO would not claim exemption from charges that were merely for public utility services. When the WHO decided to construct a building to house its offices and other United Nations offices in Manila, a further agreement was executed on November 26, 1957, allowing the WHO to import construction materials free from duties and taxes and reiterating the tax exemptions under the Host Agreement. The WHO informed bidders that the building belonged to an international organization with diplomatic status exempt from all fees, licenses, and taxes, and instructed them not to include such items in their bids.

The World Health Organization (WHO) is an international organization with a regional office in Manila. On July 22, 1951, the Republic of the Philippines and the WHO entered into a Host Agreement granting the Organization privileges and immunities, including under Section 11 exemption from all direct and indirect taxes, with the understanding that the WHO would not claim exemption from charges that were merely for public utility services. When the WHO decided to construct a building to house its own offices and other United Nations offices in Manila, a further agreement was executed on November 26, 1957, allowing the WHO to import construction materials and fixtures free from all duties and taxes and referring back to the Host Agreement's tax exemptions.

In inviting bids for the construction, the WHO informed bidders that the building belonged to an international organization with diplomatic status, exempt from all fees, licenses, and taxes, and that their bids should not include items for such taxes, licenses, and other payments to government agencies. The construction contract was awarded to respondent John Gotamco & Sons, Inc. on February 10, 1958 for a stipulated price of P370,000.00, which ultimately reached P452,544.00 upon completion.

Sometime in May 1958, the WHO received an opinion from the Commissioner of the Bureau of Internal Revenue stating that the 3% contractor's tax was an indirect tax on the assets and income of the Organization, and that gross receipts derived by contractors from their contracts with the WHO were exempt under the Host Agreement. However, on June 3, 1958, the Commissioner reversed this opinion, stating that the 3% contractor's tax was neither a direct nor an indirect tax on the WHO but a tax primarily due from the contractor, and thus not covered by the Host Agreement.

On January 2, 1960, the WHO issued a certification confirming that contractors had been informed there would be no taxes or fees levied upon them for work in connection with the construction, as such taxes would be considered an indirect tax on the Organization caused by the increase of the contractor's bid to cover them, and that this had been upheld by the Bureau of Internal Revenue. The certification stated that Gotamco's bid, made under those conditions, should be exempted from any taxes in connection with the construction. On January 17, 1961, the Commissioner of Internal Revenue sent a letter of demand to Gotamco for payment of P16,970.40, representing the 3% contractor's tax plus surcharges on the gross receipts received from the WHO construction project.

Gotamco appealed the Commissioner's decision to the Court of Tax Appeals, which ruled in favor of Gotamco and reversed the Commissioner's assessment. The Commissioner then elevated the matter to the Supreme Court on certiorari.

• Validity of the Host Agreement: Petitioner contended that the Host Agreement was null and void for lack of ratification by the Philippine Senate as required by the Constitution.
• Nature of the Contractor's Tax: Petitioner maintained that the 3% contractor's tax was in the nature of an excise tax — a charge imposed upon the performance of an act, the enjoyment of a privilege, or the engaging in an occupation — and was due primarily and directly from the contractor, not on the owner of the building, and therefore had no bearing upon the WHO and could not be deemed indirect taxation upon it.
• Applicability of Philippine Acetylene: Petitioner claimed that under the authority of Philippine Acetylene Company vs. Commissioner of Internal Revenue, the 3% contractor's tax fell directly on Gotamco and could not be shifted to the WHO.

• Indirect Tax Character of the Contractor's Tax: Respondent, through the Court of Tax Appeals' reasoning, countered that the contractor's tax, while payable by the contractor, was ultimately shouldered by the owner of the building because the contractor shifts the burden to the owner as a matter of self-preservation, making it an indirect tax on the WHO within the meaning of the Host Agreement.
• Distinguishing Philippine Acetylene: Respondent argued that Philippine Acetylene was not controlling because the Host Agreement specifically exempted the WHO from "indirect taxes," a circumstance absent in that earlier case.

• Validity of the Host Agreement: Whether the Host Agreement between the Philippines and the WHO is valid and binding without ratification by the Philippine Senate.
• Nature of the Contractor's Tax: Whether the 3% contractor's tax under Section 191 of the National Internal Revenue Code constitutes an "indirect tax" on the WHO within the meaning of the Host Agreement's exemption from all direct and indirect taxes.

• Validity of the Host Agreement: Yes. The Host Agreement is a valid and binding international agreement even without the concurrence of the Philippine Senate, as less formal types of international agreements may be entered into by the Chief Executive without legislative ratification.
• Nature of the Contractor's Tax: Yes. The 3% contractor's tax is an indirect tax on the WHO because, although payable by the contractor, the burden is shifted to the owner through the construction price, bringing it within the Host Agreement's exemption from indirect taxes.

• Validity of the Host Agreement: While the Constitution requires treaties to be ratified by the Senate, less formal types of international agreements may be entered into by the Chief Executive and become binding without legislative concurrence. The Host Agreement falls within this latter category. The Court had previously recognized the privileges and immunities granted to the WHO under the Host Agreement as legally binding on Philippine authorities, citing World Health Organization and Dr. Leonce Verstuyft vs. Hon. Benjamin Aquino, etc., et al. The Court found no merit in petitioner's contention that the Agreement was null and void for lack of Senate ratification.

• Nature of the Contractor's Tax: Direct taxes are those demanded from the very person intended to pay them, while indirect taxes are those demanded in the first instance from one person in the expectation and intention that he can shift the burden to someone else. The contractor's tax is payable by the contractor, but in the last analysis the owner of the building shoulders the burden because the contractor shifts the tax to the owner as a matter of self-preservation. Thus, it is an indirect tax, and it is an indirect tax on the WHO because the contractor can shift its burden to the Organization. The Philippine Acetylene case was distinguished: that case involved a sales tax on goods which under the law had to be paid by the manufacturer or producer, and the fact that the tax was added to the price did not make it a tax on the purchaser. The Host Agreement, however, specifically exempts the WHO from "indirect taxes," contemplating taxes which, although not imposed upon or paid by the Organization directly, form part of the price paid or to be paid by it. Section 12 of the Host Agreement elucidates this intention by providing for remission or return of duties and taxes forming part of the price paid by the WHO on important purchases. The WHO's certification dated January 2, 1960 confirmed that contractors were informed no taxes would be levied upon them, as such taxes would be an indirect tax on the Organization caused by the increase of the contractor's bid. The 3% contractor's tax falls within this category, as its payment or inclusion in the bid price would have meant an increase in the construction cost of the building.

• Direct vs. Indirect Taxation — Direct taxes are those demanded from the very person who, it is intended or desired, should pay them; indirect taxes are those demanded in the first instance from one person in the expectation and intention that he can shift the burden to someone else. The Court applied this distinction to hold that the contractor's tax, though payable by the contractor, is an indirect tax on the building owner because the contractor shifts the burden to the owner through the construction price.

• Validity of Less Formal International Agreements Without Senate Ratification — While treaties require Senate ratification under the Constitution, less formal types of international agreements may be entered into by the Chief Executive and become binding without legislative concurrence. The Host Agreement between the Philippines and the WHO was held to fall within this category and was thus valid and enforceable.

• Treaty-Based Tax Exemption for Indirect Taxes — A host agreement exempting an international organization from "indirect taxes" contemplates taxes which, although not imposed upon or paid by the organization directly, form part of the price paid or to be paid by it. The Court relied on Section 12 of the Host Agreement, which provided for remission or return of duties and taxes forming part of the price paid by the WHO, as illuminating the parties' intention to exempt the WHO from indirect taxation.

• "While treaties are required to be ratified by the Senate under the Constitution, less formal types of international agreements may be entered into by the Chief Executive and become binding without the concurrence of the legislative body." — This passage establishes the ratio decidendi on the validity of the Host Agreement without Senate ratification, distinguishing formal treaties from less formal executive agreements.

• "The contractor's tax is of course payable by the contractor but in the last analysis 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. Thus, it is an indirect tax." — This passage, quoted by the Court from the Court of Tax Appeals' decision, articulates the controlling rationale for classifying the contractor's tax as an indirect tax on the WHO.

• "The Host Agreement, in specifically exempting the WHO from 'indirect taxes,' contemplates taxes which, although not imposed upon or paid by the Organization directly, form part of the price paid or to be paid by it." — This passage defines the scope of the Host Agreement's indirect tax exemption and explains why the contractor's tax falls within it.

• Usaffe Veterans Association, Inc. vs. Treasurer of the Philippines, et al., 105 Phil. 1030 — Cited as authority for the proposition that less formal international agreements may be entered into by the Chief Executive without Senate concurrence.

• World Health Organization and Dr. Leonce Verstuyft vs. Hon. Benjamin Aquino, etc., et al., 48 SCRA 242 — Cited as authority that the privileges and immunities granted to the WHO under the Host Agreement are legally binding on Philippine authorities.

• Philippine Acetylene Company vs. Commissioner of Internal Revenue, et al., 127 Phil. 461 — Distinguished. That case involved a sales tax on goods payable by the manufacturer or producer, and the fact that the tax was added to the price did not make it a tax on the purchaser. The Court held it was not controlling because the Host Agreement specifically exempted the WHO from indirect taxes, a circumstance absent in Philippine Acetylene.

• Section 191, National Internal Revenue Code — Imposes the 3% contractor's tax on gross receipts. The Court was called upon to determine whether this tax applied to Gotamco's gross receipts from the WHO construction project in light of the Host Agreement's tax exemption.

• Section 11, Host Agreement (July 22, 1951) — Provides that the WHO, its assets, income, and other properties shall be exempt from all direct and indirect taxes, with the understanding that the Organization will not claim exemption from taxes that are merely charges for public utility services. The Court construed "indirect taxes" to include the contractor's tax shifted to the WHO through the construction price.

• Section 12, Host Agreement (July 22, 1951) — Provides that while the WHO will not, as a general rule, claim exemption from excise duties and taxes on the sale of property forming part of the price, the Government shall make administrative arrangements for remission or return of such duties or taxes on important purchases for official use. The Court relied on this provision to elucidate the Agreement's intention to exempt the WHO from indirect taxation.

• Article III, paragraph 2, Agreement of November 26, 1957 — Allows the WHO to import construction materials and fixtures free from all duties and taxes, and references the Host Agreement's tax exemptions.

• Article VIII, Agreement of November 26, 1957 — Refers back to the Host Agreement of July 22, 1951, which granted the Organization exemption from all direct and indirect taxes.

Narvasa, Melencio-Herrera, Cruz, Feliciano, Gancayco, and Sarmiento, JJ., concurred.