BIR Ruling [DA-069-06]

March 1, 2006 BIR RULING [DA-069-06] BIR Ruling No. DA-238-2005 Isopharma Incorporated G/F, JM Business Center Osmea Highway cor. Rockefeller St. Makati City Attention: Mr. Roberto L. Libarnes President and Managing Director Gentlemen : This refers to your letter dated November 30, 2005 requesting for confirmation on the non-taxability of Isopharma Inc.'s ("the Company") receipts from clients of monies representing advance payments to third parties for expenses incurred in the marketing projects; monies which are merely entrusted to the Company and eventually used to pay third parties without any benefit to the Company; expenses that are invoiced and/or receipted directly in the name of the clients by the person(s) performing the services; and, are not covered by the Company's VAT invoice/receipt. As represented, the Company is a domestic corporation organized and existing under the laws of the Philippines, registered with the Revenue District Office No. 48 (West Makati), Revenue Region No. 8 and with Taxpayer Identification No. (TIN) 211-415-806-000. The Company is engaged in market support services for various clients in the pharmaceutical industry, where services rendered by the Company include organization and management of marketing projects for the clients, and as consideration receives management, service and success fees. Part of the amounts received from clients represent advance payments to third parties for expenses incurred in the projects and where the amounts are invoiced/receipted directly in the name of the clients by the person(s) performing the service and which no VAT invoices/receipts are issued by the Company. In reply, please be informed that the case of Isopharma Inc. is on all fours with the case in BIR Ruling No. DA-238-2005 dated June 1, 2005 wherein this Office ruled as follows: "xxx xxx xxx II. The amounts received by Acabar from its clients representing advance payment to third parties for expenses incurred in the project that are monies which are merely entrusted to it and paid to respective third parties without any benefit to the Company; that are invoiced directly in the name of the clients by the person(s) performing the service and are not covered by the official receipts of the Company do not represent income to Acabar and therefore shall not be subject to income tax. In BIR Ruling No. DA 484-2004, Telecoms Infrastructure Corporation of the Philippines (Telephil) was appointed attorney-in fact of the Management Committee tasked to exercise the responsibilities, duties and powers in connection with the construction, service and maintenance of the National Digital Transmission Network (NDTN). Under the set-up, Telephil received money from the NDTN co-owners for payment of costs related to services it rendered (Telephil costs) which Telephil reported as Sales for tax purposes. It also received money from the NDTN co-owners for maintenance costs of NDTN (NDTN Costs). Based on the cases of McCann Erickson (Philippines), Inc. vs. Commissioner of Internal Revenue C.T.A. Case No. 5966, March 13, 2003 and Commissioner of Internal Revenue vs. Tours Specialists, Inc ., G.R. No. 66416 dated March 21, 1990, this Office ruled that money received from the NDTN co-owners for payment of NDTN costs are funds merely held in trust by Telephil for eventual remittance to the supplier of goods and the contractors of services . . . . The money received, therefore, is not in the nature of fee or consideration for the services of Telephil. The ruling states: 'Accordingly, inasmuch as the money received by Telephil for NDTN costs does not represent income to Telephil, said amount, therefore, shall not likewise be subject to income tax and consequently to withholding tax.' In the case of Commissioner of Internal Revenue vs. Tours Specialists, Inc ., G.R. No. 66416 dated March 21, 1990 citing the case of Commissioner of Internal Revenue vs. Manila Jockey Club, Inc. , 108 Phil. 882, the Supreme Court declared that '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.' In the foregoing case, the Supreme Court affirmed the decision of the Court of Tax Appeals which 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 travel agency to the hotels. In said case, the Court 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; but only formed sums for payment to the hotels, without any portion thereof being diverted to its own funds. In the instant case, since the monies received by Acabar from its clients representing advance payment to third parties for expenses incurred in the project and, therefore, do not redound to the benefit of Acabar, said amounts shall not form part of its gross receipts subject to 10% VAT imposed under Sec. 108 of the Tax Code of 1997." In view of the foregoing, this Office confirms that Isopharma Inc.'s receipts from clients of monies representing advance payments to third parties for expenses incurred in the marketing projects; monies which are merely entrusted to the Company and eventually used to pay third parties without any benefit to the Company; expenses that are invoiced and/or receipted directly in the name of the clients by the person(s) performing the services; and, are not covered by the Company's VAT invoice/receipt are not subject to income and value-added taxes in the hands of Isopharma. However, Isopharma Inc. is advised to remind its clients to withhold the proper tax on the services performed by said third parties. 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 as null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service