BIR Ruling [DA-130-04]

March 26, 2004 BIR RULING [DA-130-04] RR 15-2002; RR 2-98; 34-2000; 178-98 International Air Transport Association 12/F Sagittarius Building H.V. dela Costa Street Salcedo Village, Makati City Attention: Mr. Marcelito S. Jovida IDFS Manager-Philippines Gentlemen : This refers to your letters dated October 24, 2002 and November 18, 2002 requesting for clarification on the following issues: 1. Whether or not International Air Transport Association, Phils. (IATA Phils.) is required to withhold taxes under the Expanded Withholding Tax on cargo sales proceeds it receives from cargo agents via a direct deposit to the IATA-Cass Hinge Account which are automatically distributed or remitted to the member airlines on the following day? 2. Are the taxes withheld by cargo agents sufficient compliance with the withholding tax provisions of the NIRC in view of the nature of the transaction coupled with the tax-exempt status of IATA Phils., being a non-profit organization? 3. What withholding tax rate should be withheld on income payments to international airlines as a transportation contractor considering that majority of foreign international airlines are covered by tax treaties between the Republic of the Philippines and the foreign country where the international airline is a resident? It is represented that IATA-Phils. is a branch office of the IATA Head Office located in Montreal, Canada; that it is registered with both the Securities and Exchange Commission (SEC) and the Bureau of Internal Revenue (BIR) as a non-profit organization mainly to administer and manage the accreditation and monitoring of passenger and cargo sales of travel and cargo agents; that IATA-Phils. serves as a clearinghouse; that its operation is subdivided into the Bank Settlement Plan (BSP) and Cargo Account Settlement System (CASS); that BSP refers to passengers while CASS relates to cargo; that its operating expenses are shared, billed and reimbursed by participating member airlines in accordance with a set of established worldwide systems and procedures for sharing administration/clearing expenses; that the transactions that gave rise to your queries are the following: 1. An exporter or shipper obtains the services of a Cargo Agent who is a duly accredited participant of IATA-CASS. Cargo Agent issues an Airline Airway bill (AWB) and bills the exporter or shipper for cost of freight plus markup, documentation and transportation expenses etc. 2. Cargo Agent, in turn, reports its sales of services to IATA Phils. under its CASS by submitting copies of the airlines AWBs issued for each sales period covering 1-15 and another 16-end of month not later than the 5th day after end of each half month sales period to an Independent Encoding Agency (IEA) contracted by IATA Phils. The data files generated by the IEA are transmitted electronically to IATA Singapore (another branch office of IATA which has the capability to undertake computer processing of sales data) where the data is processed. IATA Singapore then generates cargo agents billing analysis and airline billing analysis which are sent electronically also to the concerned cargo agents and airlines respectively. The resulting reports are reviewed by both cargo agents and airlines vs. the AWB copies and any discrepancies noted are either covered by Agency Debit Memos (ADMs) or Agency Credit Memos (ACMs) which are to be taken up in the succeeding sales reporting period as period adjustments. There are at present ninety two (92) participating cargo agents and twenty two (22) member airlines. Transactions are in two (2) acceptable currencies ( i.e. in PHP and/or USD) 3. The Cargo Agent remits its payment to the airline via direct deposit to the IATA-CASS Hinge Account maintained with a local branch of an international bank, which is maintained one in PHP and another in USD. The cargo agent then remits to the BIR the two percent (2%) tax withheld and issues the covering Creditable Withholding Tax Certificate (CWTC) to each concerned airline. The CWTC then serves to support the deduction taken by the airline concerned in its quarterly income tax return. The whole amount deposited to the IATA-CASS Hinge Account by the Cargo Agents is automatically apportioned or distributed proportionately in accordance with the Airline Billing analysis generated by IATA Singapore to the Member Airlines concerned. Each airline will be credited or will be receiving less than one hundred percent (100%) of their share in the original amount billed per Airline Billing Analysis since two percent (2%) if not four percent (4%) thereof had earlier been deducted therefrom and remitted to the BIR as withholding tax. 4. Assuming without admitting that the payments made by cargo agents to the IATA-CASS Hinge Account constitute income payments subject to two percent (2%) withholding tax under the NIRC and its implementing regulations, cargo agents cannot withhold taxes on its remittances to the IATA-CASS Hinge Account, IATA Phil., aside from being tax-exempt organization exempt from the payment of income tax in the Philippines, is not the transportation contractor referred to in the NIRC and its implementing regulations. On the other hand, IATA-CASS's remittance of payments to the concerned airlines may be said to constitute an income payment to a transportation contractor subject to two percent (2%) withholding tax under the provisions of the NIRC and its implementing regulations. Thus, IATA-CASS would arguably be the proper entity to withhold the two percent (2%) withholding tax prior to remitting the payments to the concerned member airlines. In reply, please be informed of the following: In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no more than an agent of the government for the collection of the tax in order to insure its payment. The taxpayer, the person subject to the tax imposed by law, is the payer and the taxing authority, the payee. In other words, the withholding agent is merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-payor becomes a payee by fiction of law. His (agent) liability is direct and independent from the taxpayer, because the income tax is still imposed on and due from the latter. The agent is not liable for the tax as no wealth flowed into him he earned no income. The Tax Code only makes the agent personally liable for the tax arising from the branch of its legal duty to withhold as distinguished from its duty to pay tax. ( Comm. Of Internal Revenue vs. Court of Appeals , 301 SCRA 152 [1999]) Section 5 of Revenue Regulations No. 30-2003 provides viz : "SEC. 5. PERSONS REQUIRED TO DEDUCT AND WITHHOLD. Sec. 2.57.3 of Revenue Regulations No. 2-98, as amended, is hereby further amended to read as follows: "Sec. 2.57.3. Persons required to deduct and withhold . . . . xxx xxx xxx Agents, employees or any person purchasing goods or services paying for and in behalf of the aforesaid withholding agents shall likewise withhold in their behalf, provided that the official receipts of payments/sales invoice shall be issued in the name of the person whom the former represents and the corresponding certificate of taxes withheld (BIR Form No. 2303) shall immediately be issued upon withholding of the tax. All income payments which are required to be subjected to withholding tax shall be subject to the corresponding withholding tax rate to be withheld by the person having control over the payment and who, at the same time, claims the expenses [e.g., payments to utility companies which are required to be subjected to withholding tax shall likewise be subjected to withholding tax even if the meter or billing statement (e.g., electric or water meter or the telephone bill) is not in the name of the payor, as long as valid proof that payment of a particular expense is being shouldered by the aforementioned payor (i.e., contract between the registered user of the meter and the payor); payments made by persons who are sharing portion of the bill which is in the name of another person as long as he is a duly constituted withholding agent and shall only withhold on the portion of the expense being shouldered by him. Income payments made thru brokers or agents or other person authorized to collect/receive payments for and on behalf of the payee, whether for consideration or otherwise, shall likewise be subject to the corresponding withholding tax rates to be withheld by the payor/person having control over the payment with the corresponding issuance of certificate of taxes withheld in the name of the payee whom the agent represents. The obligation to withhold is imposed upon the buyer/payer of income although the burden of tax is really upon the seller-income earner hence, unjustifiable refusal of the latter to be subjected to withholding shall be a ground for the mandatory audit of his income tax liabilities (including withholding tax) upon verified complaint of the buyer-payor." Applying the above in the instant case, the exporter or shipper who obtains the services of a Cargo Agent should be the withholding agent who is required to withhold a two percent (2%) creditable withholding tax in favor of the government, based on the amount appearing on the airway bill after deducting therefrom the amount of discounts granted which shall be validated using the monthly cargo sales reports generated by the IATA CASS for airway bills issued through their cargo agents or the monthly report prepared by the airlines themselves or by their general sales agents for direct issues made as provided for under Section 5 of Revenue Regulations No. 15-2002. On the above bases and on the theory that IATA Phils. was but a conduit and was not actually the payor, it was not authorized to withhold the said expanded withholding tax on cargo sales proceeds it receives from cargo agents via a direct deposit to the IATA-Cass Hinge Account which are automatically distributed or remitted to the member airlines on the following day. However, there is no prohibition for the payor to designate an agent to act for and in his behalf in the remittance of the said tax as long as the said remittance and payments were made in the name of the payors. ( BIR Ruling No. 034-2000 dated September 5, 2000 ) Thus, after due consideration, this Office is of the opinion as it hereby holds that IATA is an agent of the airlines and withholding should be from the payor's end, which in this case refers to the cargo agent. Nevertheless, since IATA was designated an agent to act for and in behalf of the airlines in the remittance of the said tax, IATA Phils. would arguably be the proper entity to withhold the 2% withholding tax prior to remitting the payments to the concerned member airlines, since it has control of such money payments. Hence, it shall effectively be the duly constituted withholding agent pursuant to the above section of Revenue Regulations No. 30-2003. ( BIR Ruling No. 178-98 dated December 24, 1998 ) With respect to the rate of withholding tax, the same shall withhold 2% on its remittances to the said foreign airlines being a transportation contractor pursuant to Section 2.57.2(E)(3)(e) of Revenue Regulations No. 6-2001. However, the preferential tax rate of 1.5% may be extended on foreign airlines whose country of registry extends the same benefits to Philippine airlines pursuant to a tax treaty. 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. caIACE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group