San Miguel Corporation

February 1, 2008 BIR RULING [DA-058-08] RR 2; RAMO 1-98; 01-90; DA-511-06; DA-462-06 San Miguel Corporation San Miguel Head Office Complex No. 40 San Miguel Ave. Mandaluyong City Attention: Mr. Alfredo R. Villacorte Vice President and Tax Manager Gentlemen : This refers to your letter dated December 21, 2007 requesting confirmation of your opinion that reimbursements received by San Miguel Corporation (SMC) from its affiliates/subsidiaries for advances made on payments for utilities and services are exempt from Expanded Withholding Tax (EWT) and Value-Added Tax (VAT). It is represented that SMC is a corporation duly organized and existing under the laws of the Philippines and is engaged in the food, beverage and packaging businesses; that it has affiliates/subsidiaries which is known as the San Miguel Corporation-Affiliates ("SMC-Affiliates"); that it was agreed by and between SMC and SMC-Affiliates that the latter shall proportionately share in the expenses for the maintenance of the SMC building which includes utilities ( i.e., electricity and water) and other services ( i.e. janitorial and security services); that the billing statement by third-party suppliers ( e.g. Meralco, Manila Water) is in the name of SMC and SMC advances payments for consumption of said utilities and subsequently seek reimbursement from SMC-Affiliates; that SMC shall issue a Statement of Account representing its proportionate share in the expense without any mark-up; that as regards expenses for security and janitorial services, the different contractors or service providers receive job requests from SMC so that the billing statements are addressed to SMC; that SMC pays the contractors/service contractors and the former seeks reimbursement from SMC-Affiliates on their proportionate share; and that the said security and janitorial services providers issue an official receipt in the name of SMC. cEaACD A. Income Tax/Withholding Tax Under Revenue Audit Memorandum Order (RAMO) No. 1-98, a cost sharing arrangement is an agreement under which the parties agree to share the costs in proportion to their respective share of anticipated benefits. Said allocation must be made on a "no-mark-up, reimbursement" type basis. Under the cost-sharing arrangement between SMC and SMC-Affiliates, the cost sharing payments of SMC-Affiliates will not result to any income for SMC since the payment actually represents reimbursements of expenses without any mark-up or profit on the part of SMC. In order for income, gain or profit to be subject to income tax, the following requisites must be present: (a) There is income, gain or profit; (b) The income, gain or profit is received or realized during the taxable year; and (c) The income, gain or profit is not exempt from income tax. Moreover, Section 36 of Revenue Regulations No. 2 states that, "income, in a broad sense, means all wealth that flows into the taxpayer other than a return of capital". Since these are merely reimbursement for costs incurred, and for income tax purposes, payments for mere reimbursement of actual cost and expenses with no mark up or profit element do not constitute income. Hence, payments for reimbursements are neither subject to income tax nor to withholding tax. (BIR Ruling No. 001-90 dated January 4, 1990; ITAD Ruling No. 062-00 dated March 21, 2000) aETDIc This position is confirmed in BIR Ruling No. DA-511-06 dated March 3, 2006, where the Bureau held that: "Reimbursement of expenses, by its very nature, is not income but merely a return of capital. As a return of capital, it is not income per se. Such being the case, it is not subject to income tax." Considering that the income payments made to SMC by the SMC-Affiliates are mere reimbursements for actual expenses without any mark-up or profit, the same is not considered as income and as such is not subject to income tax and consequently to EWT. B. Value-Added Tax (VAT) Generally, VAT is imposed on any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services based on the gross receipts. (Section 106, Tax Code of 1997, as amended) . Based on the above definition, the VAT attaches to the following transactions: (i) barter or exchange of goods or properties, (ii) performance of service and (iii) importation of goods which are all done or performed "in the course of trade or business of the taxpayer." CaATDE Section 108 of the Tax Code of 1997 defines the phrase "sale of services" as the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, . . . ." It includes, among others, "the supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking or project." (Sec. 4.102-1, Rev. Regs. No. 7-95, now under Sec. 108-2 of Rev. Regs. No. 16-2005) As applied in this case, SMC is not engaged in the sale of service to SMC-Affiliates. Neither does SMC supply any technical advice, assistance or services to SMC-Affiliates. And more significantly, SMC does not receive any fee, remuneration or consideration precisely since there is no sale of service rendered to SMC-Affiliates. The reimbursements paid by SMC-Affiliates are merely to defray the expenses incurred by SMC and do not represent fee, remuneration or consideration. Hence, this is not subject to VAT. TCEaDI In BIR Ruling No. DA-462-06 dated July 28, 2006 the BIR held that: "Incidentally, in reimbursement-at-cost transactions, expenses which are incurred by the advancing party for the benefit and for the account of the party accommodated, can be considered reimbursable expenses not forming part of gross receipts of the advancing party subject to tax. Since the party seeking reimbursement does not sell, barter, exchange, nor lease any good or property and neither does it render any service to the party accommodated, the reimbursement transactions are not subject to the 10% VAT. The mere collection of purely reimbursable costs billed, for instance, in the name of a client but collected through a broker or agent shall not be subject to the 10% VAT provided that such fact of reimbursement is clearly shown in the billing and/or official receipt and being a reimbursement of expenses without any mark-up or profit element and not charges for services, should not be considered as part of gross receipts for purposes of the expanded withholding tax (cited in BIR Ruling No. DA-304-2004 dated June 2, 2004)." (Emphasis supplied) In sum, we rule that since the income payments received by SMC from SMC-Affiliates are mere reimbursements for advances made for utilities and services and considering further that said reimbursements are without any mark-up or profit, the said payments are not considered income of SMC and are consequently exempt from EWT. Moreover, said reimbursements are not subject to VAT since SMC is neither engaged in the sale of service to SMC-Affiliates nor does it receive the payments from SMC-Affiliates as fee/remuneration for services rendered by SMC. DHIaTS 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, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service