Contributor

INEVITABLE is the fact that taxes and public contracts will remain deeply intertwined. This is because every peso collected from taxpayers provides the primary funding for government projects, and strict tax compliance is a statutory and continuing requirement for contractors seeking to partner with the government in delivering these projects.

In this context, securing a tax clearance becomes increasingly vital, not merely as a formality, but as a measure to ensure that only qualified and compliant contractors are entrusted with public funds. This requirement has never been more important, especially with the recent discussions in both mainstream and social media regarding the alleged irregularities in public contracts. If these allegations are proven to be true, they could erode public trust and lead to the misuse of taxpayers’ hard-earned contributions intended for national development.

In response to these concerns, the Commissioner of Internal Revenue, Romeo Lumagui Jr, has issued a directive for all Bureau of Internal Revenue (BIR) offices to conduct parallel tax fraud investigations on contractors linked to the allegedly anomalous flood control projects. In this directive, the BIR will audit the tax compliance of these entities, and those found to have underpaid or evaded taxes may be denied updated tax clearance, disqualified from future government procurements, and suspended from final settlement of existing contracts.

With this, the role of a tax clearance and its integrity is crucial, as it serves as one of the means to ensure compliance and accountability of every contractor. It is not merely a certificate of tax compliance but a declaration of commitment to paying fair and accurate taxes to the government. In public projects, tax clearances are required in two stages: (1) before the bidding and award, and (2) before the final settlement or payment for the goods delivered or services rendered to the government.

Pre-bid tax clearance

The requirement for a tax clearance before a government contract is awarded to a contractor is an indispensable part of the procurement process. This requirement is anchored in Executive Order (EO) No. 398, series of 2005, which mandates that the submission of tax returns, along with proof of payment and a valid tax clearance, is a prerequisite for participating in the bidding process for public projects. This mandate is further reinforced by the 2016 Implementing Rules and Regulations (IRR) of Republic Act (RA) No. 9184, also known as the Government Procurement Reform Act, which requires bidders to upload, maintain, and update their tax clearance in the Philippine Government Electronic Procurement System (PhilGEPS). Under the law, the tax clearance serves as official proof of the bidder’s timely and complete payment of taxes.

To further implement the law, the BIR issued Revenue Regulations (RR) No. 3-2005, as amended by RR No. 1-2016, requiring the submission of the Sworn Application Form for Tax Clearance Certificate for Bidding Purposes, available on the BIR’s Official Website, along with the necessary documentary requirements.

To be issued a six-month valid tax clearance, applicants must be fully compliant with the criteria set forth in the regulations, which include having no unpaid annual registration fees, no active “stop-filer” cases, and no pending criminal charges with the Department of Justice (DOJ) or any competent court. Additionally, new applicants must be regular users of the BIR’s Electronic Filing and Payment System (eFPS) for at least two consecutive months. Applicants must not have any delinquent tax accounts.

However, tax assessments that have been timely protested, whether administratively or judicially, are not considered delinquent, in accordance with RR No. 12-99, as amended. In certain cases, applicants with tax assessments under judicial dispute or subject to abatement or compromise settlement under Section 204 of the Tax Code may still be eligible for a tax clearance, provided they secure an escrow deposit with an authorised agent bank equivalent to the disputed tax liabilities.

Under the IRR of R.A. No. 9184, a bidder’s failure to submit a valid and unexpired tax clearance during the post-qualification stage will result in their automatic disqualification.

Tax clearance before final settlement of government contracts

The need for tax clearance does not end with the contract’s award, as compliance with tax laws and regulations is a continuing requirement. With this, a separate tax clearance, known as the Tax Clearance Certificate for Final Settlement of Government Contracts (TCFG), is required for the final payment to the contractor. EO No. 398 provides for the entitlement of the government to suspend payment for any goods or services delivered by the private contractor to the procuring government entity should it fail to pay and file its taxes on time. This requirement is reinforced by RR No. 17-2024, as supplemented by Revenue Memorandum Order No. 002-2025.

To secure a TCFG, applicants must submit a duly accomplished Sworn Application Form for TCFG, available on the BIR’s Official Website, along with a certification from the concerned government agency on the final collectible payment due to the contractor, including other documentary requirements. Upon receipt of the complete application, the BIR will conduct a verification to ensure that all tax liabilities and obligations related to the project have been fully settled and complied with.

The consequence of failing to secure a TCFG is the non-release of final payment for the project, as provided under RR No. 17-2024. The government agency cannot legally settle the remaining balance until the contractor provides this clearance. Additionally, those found to be engaged in and charged with tax evasion can be disqualified from participating in public contracts, as the absence of a pending criminal charge with the DOJ or any competent court is a requirement to be issued a tax clearance under RR No. 3-2005, as amended by RR No. 1-2016.

Tax clearance as a safeguard

The requirement for tax clearance is one of the safeguards employed by the government to uphold transparency and accountability in public projects. It is a mechanism that identifies non-compliant contractors at the onset and ensures continued compliance with tax laws and regulations throughout the project.

By strictly enforcing compliance with this requirement and preserving its integrity, the government not only secures revenue for public services but also emphasises the requirement that those who seek to engage in government contracts must be committed to comply with tax and other laws. Aside from the execution of the directive of the Commissioner to investigate the allegedly anomalous contractors, the consistent implementation and compliance with the rules governing tax clearances will send a clear message that partnership with the government demands not only competence but also integrity, accountability, and a genuine commitment to nation-building.

Paul Santos is a Manager for the Tax Advisory & Compliance Practice Area at P&A Grant Thornton. One of the leading audit, tax, advisory, and outsourcing firms in the Philippines, P&A Grant Thornton is composed of 29 Partners and 1,500 staff members. We’d like to hear from you! Connect with us on LinkedIn and like us on Facebook: P&A Grant Thornton and email your comments to business.development@ph.gt.com. For more information, visit our website: www.grantthornton.com.ph.