BIR Ruling [DA-143-06]

March 17, 2006 BIR RULING [DA-143-06] Rev. Regulations No. 17-2003; DA-426-2003 Bernaldo Mirador & Directo Law Offices Unit 1807 Cityland Condominium 10 Tower 1 6815 Ayala Avenue cor H.V. de la Costa St., Makati City Attention: Atty. Rosario S. Bernaldo Managing Partner Gentlemen : This refers to your letter dated April 20, 2005 requesting in behalf of your client, GEOLOGISTICS, INC. for confirmation of your opinion that reimbursable expenses are not considered as income payments, hence, not subject to withholding tax. It is represented that GEOLOGISTICS, INC. is a domestic corporation formed and organized under the laws of the Philippines, engaged in the business of providing logistics services, specifically, to provide total solutions to various logistics requirements of the clients such as airfreight forwarding, sea freight forwarding, customs clearance, warehouse and distribution, vendor-managed inventory, domestic freight forwarding and project cargo; that in the course of providing services as a customs broker, GEOLOGISTICS, INC. incur certain expenses such as arrastre, wharfage dues, form and waybills, magna scale, documentation fee, trucking and handling charges, customs duties, toll fees, and other similar fees, which actually are for the account of its clients; that you opine that, as enunciated in the various rulings, advances made by the customs broker for and in behalf of its clients to pay expenses such as arrastre, wharfage dues, form and waybills, magna scale, documentation fee, trucking and handling charges shall not form part of the customs broker's gross receipts for withholding tax purposes provided that the above expenses are invoiced directly in the name of the broker's client by the person performing such service, and such reimbursements are not invoiced with the broker's VAT invoice/official receipt; that in compliance with the requirements of the BIR, GEOLOGISTICS, INC. issues and prepares two (2) kinds of invoices when it bills its clients; that the first invoice is a VAT-invoice, which bills the customs broker's fee, and expenses for transportation, overtime, facilitation fee, and other expenses incurred to facilitate the clearing of goods through customs; that the second invoice is a non-VAT invoice, which bills expenses such as arrastre, wharfage dues, form and waybills, magna scale, documentation fee, trucking and handling charges, customs duties, toll fees, and other similar fees, and which are directly receipted in the name of the clients. In reply, please be informed that Section 2.57.2 (E) (3) of Revenue Regulations No. 2-98 dated April 17, 1998, as amended by Revenue Regulations No. 6-2001 which enumerates the transactions subject to creditable withholding tax, provides as follows: TDEASC Sec. 2.57.2 Income payments subject to creditable withholding tax and rates prescribed thereon . Except as herein otherwise provided, there shall be withheld a creditable withholding income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines: xxx xxx xxx (E) Income payments to certain contractors On gross payments to the following contractors, whether individual or corporate Two percent (2%) xxx xxx xxx Pursuant to Revenue Memorandum Circular No. 9-2006 dated January 25, 2006, as a rule, all income payments which are required to be subjected to withholding of income 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. However, it has been observed that while the brokers, as agents of their Customers (importers/exporters), have control over payment of reimbursable expenses and/or advance payments, they do not claim the same as their own expenses. Thus, considering the peculiarity of the said situation, the Customers who are ultimately claiming the same as their own expenses shall be the ones primarily responsible for remitting the withholding taxes due thereon although the issuance of the corresponding Certificates of Taxes Withheld (BIR Form No. 2307) shall be the responsibility of the brokers who should issue the same, on behalf of the Customers as payors, in the name of or to the Third Party Service Providers as payees upon payment by the brokers to the said third-party service providers of the reimbursable expenses, net of the Expanded Withholding Tax. In other words, upon making the payments to the third-party service providers (the persons to whom the advance payments have been made by the brokers), the brokers shall pay or advance the prescribe amount net of the required expanded withholding tax (EWT), which net amount is the amount that should be requested for reimbursement from the Customers while the retained amount pertaining to the Expanded Withholding Tax shall be remitted to the BIR by the said Customers. The Certificate of Tax Withheld (BIR Form No. 2307) shall reflect the name of the Customer as the payor of the billed income payment, the name of the broker as the agent of the real payor who is the Customer, and the name of the third-party service provider as the payee of the billed income payment. DcTSHa With respect to the reimbursement to the brokers by their Customers of the reimbursable expenses and/or advanced payments of the former in favor of the latter following the prescribed procedures of Revenue Memorandum Circular No. 9-2006, the same shall no longer by subject to EWT since the payments do not form part of the gross receipts of the brokers. They merely collect what they advanced on behalf of their Customers and hence, they do not derive income from collecting such advances. However, for reimbursable expenses and/or advanced payments redounding to the benefit of the brokers, and all other reimbursable expenses covered by VAT official receipts of the brokers, the same shall, upon reimbursement by the customers, form part of the broker's gross receipts and shall therefore be subject to EWT notwithstanding that such reimbursements are for payments for reimbursable expenses and/or advanced payments made by brokers on behalf of their Customers. Finally, a reading of the above regulations disclose that indeed, income payments to certain contractors are subject to the 2% creditable withholding tax. In the case of freight forwarding however, income payments do not include reimbursable expenses, since no income is generated from these reimbursements. Advances made by the customs broker for and in behalf of its clients to pay expenses such as arrastre, wharfage dues, form and waybills, magna scale, documentation fee, trucking and handling charges shall not form part of the customs broker's gross receipts for withholding tax purposes provided that the above expenses are invoiced directly in the name of the broker's client by the person performing such service, and such reimbursements are not invoiced with the broker's VAT invoice/official receipt and all the conditions set forth in Revenue Memorandum Circular No. 9-2006 are complied with. 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service