BIR Ruling [DA-076-06]

March 3, 2006 BIR RULING [DA-076-06] DA-384-98 DA-316-03 Aranas Consunji Barleta Law Office Unit 106, Le Metropole Bldg. 326 Tordesillas Cor. Dela Costa Sts. Salcedo Village, Makati City Attention: Jesus Clint O . Aranas Partner This refers to your letter requesting on behalf of your client, Tutuban Properties, Inc. ("TPI") for confirmation of your opinion that: 1. The monies received by TPI from its tenants as payments for direct utilities and services are not subject to Value Added Tax (VAT) and Expanded Withholding Tax (EWT). 2. The monies received by TPI from its tenants as payment for Common Usage and Service Area (CUSA) expenses are not subject to VAT and EWT. It is represented that TPI is a corporation organized to primarily deal and engage in real estate business; that at present, it is leasing commercial spaces at the Tutuban Mall; that as an incident to the operation of its business, TPI incurs common usage and service area expenses, including but not limited to electricity, water, repairs and maintenance. As an industry practice, these expenses are billed by the utility or service providers (i.e. Meralco, Maynilad, and TPI's contractors) in which case TPI will issue a billing statement to its tenants to charge the above expenses at cost on a pro-rata basis; that in the case of direct utilities and services, these are expenses directly attributable to a tenant that for example, in the case of repairs and maintenance ascribed to a tenant's stall, the contractor for the repairs will send a statement of account to TPI for the services rendered; that in turn, TPI will issue a billing statement to that tenant for the expense incurred; that moreover, for electricity and water, TPI maintains a mother meter which indicates the total utility consumption to be paid by TPI for a certain period; that TPI would initially advance the payment to the utility companies and would then subsequently issue a billing statement to its tenants using the individual sub-meters maintained by each tenant as basis; that thus, the utility charges paid are allocated to each tenant based on actual consumption, but nonetheless does not constitute money or income received by TPI. In reply, please be informed that the monies received by TPI from its tenants as payments for direct utilities and services are not subject to Value Added Tax (VAT) and Expanded Withholding Tax (EWT). 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 payment per se. Such being the case, it is not subject to income tax. In the case at bar, the expenses directly and indirectly attributable to TPI's tenants are billed to its various tenants depending on their levels of consumption: These amounts are actually payments for such direct and indirect expenses. As such, they are not income payments subject to income and withholding tax. In BIR Ruling No. 384-98, the BIR ruled as follows: "In reply, please be informed that your opinion is hereby confirmed. By its very nature, reimbursements of costs are not income for they are mere returns of capital. Accordingly, said reimbursements are not subject to withholding tax prescribed under Revenue Regulations No. 2-98. (BIR Ruling Nos. UN-262-95 dated July 11, 1995; UN-245-95 dated July 5, 1995, 1-90 dated January 4, 1990; 345-88 dated July 20, 1988; 202-81 dated October 22, 1981 and 061-79 dated July 23, 1979)" Accordingly, and on the basis of the foregoing, your opinion that monies received by TPI from its tenants for payments of direct utilities and services are not subject to VAT and EWT is hereby confirmed. Furthermore, in the case of Commissioner of Internal Revenue vs. Manila Jockey Club, Inc ., 108 Phil. 821, no less than the Supreme Court categorically ruled that monies received by the Manila Jockey Club in trust for the account of the owners of winning horses do not form part of the gross receipts of the club since the same never belonged to it. Thus, the court held: "There is no question that the Manila Jockey, Inc., owns only 7-1/2% of the total bets registered by the Totalizer. This portion represents its share or commission in the total amount of money it handles and goes to the funds thereof as its own property which it may legally disburse for its own purposes. The 5% does not belong to the club. It is merely held in trust for distribution as prizes to the owners of winning horses. It is destined for no other object than the payment of prizes and the club cannot otherwise appropriate this portion without incurring liability to the owners of winning horses. It cannot be considered as an item of expense because the sum used for the payment of prizes is not taken from the funds of the club but from a certain portion of the total bets especially earmarked for the purpose. In view of all the foregoing, I am of the opinion that in the submission of the returns for the amusement tax of 10% (now it is 20% of the 'gross receipts', provided for in Section 260 of the National Internal Revenue Code), the 5% of the total bets that is set aside for prizes to owners of winning horses should not be included by the Manila Jockey Club, Inc." The same view was reiterated by the Supreme Court in the case of Commissioner of Internal Revenue vs. Tours Specialists, Inc ., 183 SCRA 402, when it ruled that monies or receipts entrusted to the taxpayer which do not belong to them or do not redound to the taxpayer's benefit do not form part of gross receipts subject to the 3% independent contractor's tax under the National Internal Revenue Code of 1977. Thus, the court held: "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 BIR Ruling No. DA-316-03, the Bureau, applying the above mentioned court pronouncements, ruled that the amounts received by a domestic corporation to be held in trust for a foreign corporation do not form part of the taxable gross receipts even for purposes of the value-added tax. Thus, the Bureau held: "Inasmuch as being an agent, you only represent your principal your collections from tickets and airway bills sold do not form part of your taxable gross receipts as the same are collected and held in trust for and in its behalf. In short, the same is not your revenue but rather that of your principal. Hence, your taxable gross receipts (is) limited to 3% compensation for services rendered. Furthermore, it appears that you deduct your compensation from the sales proceeds of tickets and airway bills sold and remit to your principal on monthly basis. Thus, said compensation is taxable as your receipts during the taxable quarter in which collections of sales proceeds were made. Such being the case, considering that ASPAC merely holds the freight service charges for and in behalf of its principal, UPS Yamato, the same should not be included in its gross receipts for purposes of value-added tax and income tax. It is only the collection fee of 5% based on the freight charges that should be recognized as revenue for ASPAC includible in its gross receipts. In the case at bar, TPI never benefited from the monies received from its tenants as these are ultimately payments to utility companies. The monies received by TPI exclusively pertained payments for the direct utilities and services incurred. In short, TPI never received any income from the transaction which can be the subject of any tax. Accordingly, your opinion that the monies received by TPI from its tenants as payment for Common Usage and Service Area (CUSA) expenses are not subject to VAT and EWT is hereby confirmed. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it is ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Asst. Commissioner Legal Service