BIR Ruling [DA-121-05]

April 6, 2005 BIR RULING [DA-121-05] 50 (B); 108 (A) 247-92; 103-94; 401-88 De Guzman Celis & Dionisio Law Offices Suite C, 15th Floor, Strata 2000 Building Emerald Avenue, Ortigas Center Pasig City Attention: Amalia E. Dionisio Tax Partner Gentlemen : This refers to your letter dated September 13, 2004, requesting confirmation of the following concerns: 1. The 1% advertising fees collected by Red Ribbon Bakeshop, Inc. (RRBI) from its franchisees on a monthly basis should be treated as reimbursement for the advertisement/promotional expenses advanced by RRBI and/or deposit for said expenses, and not taxable income on the part of the latter, as no gain or profit is actually realized or received by RRBI therefrom; 2. The said 1% advertising fees is not subject to the withholding tax system in view of the fact that there is, in the first place, no taxable income on the part of RRBI to withhold; and 3. Since RRBI does not render advertising services to its franchisees but simply collects the funds, deposited or entrusted to it by its franchisees, which are necessary for carrying out the marketing and promotional plans in the Annual Program, no value-added tax should be imposed on the 1% advertising fees collected by it from its franchisees. It is represented that Red Ribbon Holdings, Inc. (RRHI) the owner of the trademark "Red Ribbon" has granted Red Ribbon Foods Corp. (RRFC) a master license to use the said trademark and operate Red Ribbon Bakeshops and to sub-license the same. Subsequently, RRFC was merged with RRBI with the latter as the surviving entity. As a result thereof, RRBI assumed all the rights and obligation of RRFC with regard to the latter's master license to use the trademark and to operate Red Ribbon Bakeshops. In addition, the existing Franchise Agreements (Agreements) which then RRFC entered into has been taken over by RRBI. Under the Agreements, RRBI has the right to collect and receive from the franchisees the amount of not less than 1% of the franchisees' revenues as advertising/promotional expenses. The advertising/promotional expenses are, on several occasions, advanced by RRBI which is, in turn, reimbursed by the franchisees on or before the 10th day of the following month. However, any excess in the remittance is treated as a deposit for advertising fees the concerned franchisee. Any advertising/promotional activity intended to promote the business of Red Ribbon Bakeshop would be national in scope that benefits all the franchisee. In reply, please be informed that reimbursement of the actual share of each franchisee in the advertising and promotional expenses received by RRBI is not considered as gross income derived by RRBI in the pursuit of its business. The funds are merely held in trust by RRBI to be used solely for national advertising and advertising related expenses for the benefit of all franchisees; hence RRBI does not realize any gain or profit from the funds and not subject to income tax thereon. (BIR Ruling No. 103-94 dated May 16, 1994) On the other hand, under Revenue Regulations No. 2-98, as amended, otherwise known as the Revised and Consolidated Expanded Withholding Tax Regulations implementing Section 50(b) of the Tax Code, as amended, only payments to persons enumerated therein are subject to the expanded withholding tax. Considering, that the aforementioned payments by franchisees to RRBI are not among those payments specified in said Regulations, said payments are not subject to the expanded withholding tax. However, RRBI is subject to the 1% expanded withholding tax on its gross payments to advertising agencies. ( BIR Ruling No. 247-92 dated September 7, 1992 ) Lastly, pursuant to Section 108(A) of the Tax Code of 1997, services rendered advertising agencies are subject to value-added tax. Since RRBI is not an advertising agency and the amount being collected equivalent to 1% of the gross income of the franchisees previously discussed above are mere reimbursement to the advertising fees paid to advertising agency, it is the advertising agency that is liable to VAT and not RRBI. ( VAT Ruling No. 401-88 ) TDaAHS 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, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group