BIR Ruling [DA-137-97]

March 21, 1997 BIR RULING [DA-137-97] Alba Ledesma & Co. 7/F Don Chua Lamko Bldg., H.V. dela Costa St., cor. Alfaro St. Salcedo Village, Makati City Attention: Mr . Alba Ledesma Gentlemen : This refers to your letter stating that under a "Dealership Agreement" entered into by Golden Donuts, Inc. (GDI), the Franchiser, with its dealers, the Franchisees, GDI receives a certain percentage of the Franchisees' gross sales as franchise fees; that in order to ensure consumer awareness of the Dunkin Donut Parlor, the Dealership Agreement requires the Franchisees to contribute to a National Advertising Fund (NAF) an amount equivalent to 5% of their net sales; that since the Franchisees have no central organization of their own, and realizing the impracticality and possible inequity of having the National Advertisement carried out individually by the Franchisees, it was agreed that the Franchisees' contributions to the NAF shall be made to GDI who shall take charge in national advertising and the management of NAF; and that the contributions shall be accounted for separately in the books of GDI and shall be maintained in separate bank account. In connection therewith, you are now requesting confirmation of your opinion to the effect that the contributions of the Franchisees to NAF constitutes advertising expenses which are not subject to the expanded withholding tax. In reply, please be informed that your opinion is hereby confirmed. Under Revenue Regulations No. 6-85, as amended, otherwise known as the Revised and Consolidated Expanded Withholding Tax Regulations implementing Section 50 (b) of the Tax Code, only payments to persons enumerated therein are subject to withholding tax. Accordingly, since GDI's receipt of the NAF contributions from its franchisees are merely held in trust and could realize no gain or profit as a result of its receipt but which is to be used solely for national advertising and advertising related expenses for the benefit of the said franchisees are not includible in GDI's gross income; hence, GDI is not subject to income tax and consequently to the expanded withholding tax. (BIR Ruling No. 103-94 dated May 16, 1994) Very truly yours, ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)