BIR Ruling [DA-027-06]

January 31, 2006 BIR RULING [DA-027-06] UN 248-A-95 Philippine Federation of Pre-Need Companies, Inc . 4/F Prudential Plan Building 118 Gamboa Street, Legaspi Village Makati City Attention: Mr. Jose Alberto T. Alba Director and Chairman, Accounting Committee Gentlemen : This refers to your letter dated October 25, 2005, duly signed by the members of the Philippine Federation of Pre-need Companies, Inc. (hereinafter referred to as the "FEDERATION"), requesting for confirmation of your opinion that for value-added tax (VAT) purposes the term "gross receipts" of a pre-need company should be net of actual trust fund contribution pursuant to Section 4.108-3, paragraph (j) of Revenue Regulations No. 16-2005, otherwise known as the Consolidated VAT Regulations for 2005. It appears that the FEDERATION is an association of pre-need companies primarily engaged in the business of selling and marketing of pre-need plans and as such, is classified as dealer in securities by the Securities and Exchange Commission (SEC); that on September 1, 2005, the Bureau of Internal Revenue (BIR) issued a Revenue Regulations (RR) No. 16-2005, otherwise known as the Consolidated Value-Added Tax Regulations of 2005, subjecting pre-need companies to VAT as service providers; that the same RR stated that as service providers, the compensation for their services is the premiums or payments received from the plan holders (Sec. 4.108-3, Revenue Regulations No. 16-2005); It is your contention that as service providers, the gross receipts of pre-need companies for VAT purposes should only be the premium or payment collected from the plan holders excluding the "funds" provided by the plan holders, which are being managed by the pre-need companies for them. HcISTE In reply thereto, please be informed that monies or receipts entrusted to the taxpayer, which do not redound to their benefit and do not belong to them, but were only earmarked for a specific purpose and held in trust for some person/entity, are not part of its gross receipts for the purpose of computing its taxable gross receipts. In the case of Commissioner of Internal Revenue vs. Manila Jockey Club (108 Phil. 821) , the Supreme Court (SC) ruled that amounts directed by law to be paid as prizes to owners of winning horses and jockeys were not deemed to form part of the gross receipts of the club subject to amusement tax. The SC specifically stated that "it is not necessary that there must be a law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax Code." HcSDIE The above case was reiterated in the case of Commissioner of Internal Revenue vs. Tours Specialist, Inc. G.R. No. 66416 dated March 21, 1990 , where the SC excluded from the gross receipts of a local travel agency amounts received by the latter from foreign tourist agencies which form part of the package fee paid by the tourists but were intended or earmarked for hotel room accommodations and accordingly paid by the local agency to the hotels. The SC found that the hotel charges paid by the local travel agency were taken out of funds entrusted to it by the foreign tour correspondent agency. As such, the said receipts never belonged to the local travel agency; neither did the latter from the payment of such sums to the hotels. We quote pertinent portion of the decision: ". . . gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit; and it is not necessary that there must be a law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax Code. Parenthetically, the room charges entrusted by the foreign travel agencies to the private respondent do not form part of its gross receipts within the definition of the Tax Code. The said receipts never belonged to the private respondent. The private respondent never benefited from their payment to the local hotels. As stated earlier, this arrangement was only to accommodate the foreign travel agencies." In " Manila Jockey Club ," a portion of the wager fund and the ten-peso contribution, although actually received by the Club, was not considered as part of its gross receipts for the purpose of imposing the amusement tax. Similarly, in " Tours Specialist ", the room or hotel charges actually received by them from the foreign travel agency was, likewise, not included in its gross receipts for the imposition of the 3% contractor's tax. In both cases, the fees, bets or hotel charges, as the case may be, were actually received and held in trust by the taxpayers. In the case of pre-need companies, pre-need plan holders are assured of receiving the benefits of their investments and in order to ensure delivery of the promised goods and services, pre-need companies are required to place part of the proceeds of the sale in banks as Trust fund where they earn income. SEAHID As defined in the New Rules on the Registration and Sale of Pre-Need Plans under Section 16 of the Securities Regulation Code , "trust fund" means a fund set up from Plan holders' payments, separate and distinct from the paid-up capital of a registered Pre-Need Company, established with a Trustee under a trust agreement approved by the Commission, to pay for the Benefits as provided in the Pre-Need Plan. (paragraph 1.9 of Rule 1) This trust fund (inclusive of earnings) shall be administered and managed by a trust company, bank, or investment house authorized to perform trust functions in the Philippines. No withdrawal shall be made from the trust fund except for: (1) paying the cost of services rendered or property delivered; (2) trust fees, bank charges and investment expenses in the operation of the trust fund; (3) cash surrender/termination value payable to the plan holders; (4) annuities; (5) contributions to the fund of cancelled plans; (6) taxes on trust funds; and (7) reasonable withdrawal for minor repairs and costs of ordinary maintenance of trust fund assets. Further, under the Rules, to guarantee the delivery of property or performance of services in the future, a deposit shall be made by the issuer into a Trust Fund to be established for each type of plan in accordance with the rates used in the actuarial studies computed on the basis of 45% of the contract price of pre-need plan, for cash sales, and on a graduated rate of 5%-80%, for installment sales. Clearly, contributions to the trust fund represent a certain percentage of the amounts collected from the plan holders, which are held in trust by a pre-need company and earmarked as reserved fund as mandated by the SEC and required to be deposited with a trust company to guarantee the faithful compliance of the obligation under the plan. Foregoing premises considered, we hereby confirm your opinion that gross receipts of a pre-need company should be net of actual trust fund contribution for purposes of computing the 10% value-added tax (VAT) pursuant to Section 4.108-3, paragraph (j) of RR No. 16-2005, which defines "Pre-need Companies" as follows: "SEC. 4.108-3. Definitions and Specific Rules on Selected Services . "xxx xxx xxx" (j) Pre-need Companies are corporations registered with the Securities and Exchange Commission and authorized/licensed to sell or offer for sale pre-need plans, whether a single or multi-plan. They are engaged in business as seller of services providing services to plan holders by managing the funds provided by them and making payments at the time of need or maturity of the contract. CIHTac As service providers, the compensation for their services is the premiums or payments received from the plan holders." As defined above, pre-need companies are considered to be engaged in business as seller of services providing services to plan holders by managing the funds provided by them. As service providers, the gross receipts of pre-need companies for VAT purposes should only be the premium or payment collected from the plan holders excluding the "funds" provided by the plan holders, which are being managed by the pre-need companies for them. The "funds" provided by the plan holders, which are being managed by the pre-need companies, pertain to such amount of trust fund contributions as mandated by the SEC. Therefore, such amount of trust fund contributions do not form part of the gross receipts of the pre-need companies for purposes of determining their gross receipts subject to 10% VAT. To disallow such amount credited to the trust fund would be tantamount to taxing that percentage of contributions of planholders which actually are held in trust by pre-need companies, and earmarked as reserved fund to guarantee the payment of services and/or delivery of the property or cash surrender/termination value to plan holders. ( BIR Ruling No. UN-248-A-95 dated July 16, 1995 ) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue