BIR Ruling [DA-147-06]

March 17, 2006 BIR RULING [DA-147-06] 27 (A); DA-238-2005; DA-404-2004 SM Group of Companies Building A, SM Corporate Office Bay City, Pasay City Attention: Ms . Cecilia R . Patricio VP-Corporate Tax Division Gentlemen : This refers to your letter dated June 16, 2005 requesting confirmation of your opinion that payment of vouchers ordered from Sodexho Pass, Inc. is not subject to income tax and consequently, to expanded withholding tax. It is represented that Sodexho is a corporation organized and existing under the laws of the Philippines with the following primary purposes: To set-up and fully manage services, improve and add value to the administration of benefits, privilege and/or subsidies given or granted by private or public organizations to their respective employees, business partners or beneficiaries including but not limited to the issuance and processing of service vouchers, cards and other innovative processes and generally to perform any and all acts connected with the business aforementioned or arising therefrom and/or incidental thereto, as may be allowed by existing laws, rules and regulations; that Sodexho administers the meal and food allowance benefits given by the employer (client company) to its employees through vouchers system which involves the following procedures: 1. Client company transfers to Sodexho the amount allotted for its employees' specific benefit (e.g., meal, rice subsidy) with instruction on the amount to be allotted per employee; 2. Sodexho issues vouchers (for each employee with the value allotted for the respective employees' benefit) and delivers the same to client company; 3. Client company distributes these vouchers to its employees; 4. Employees use these vouchers to receive their benefit at an accredited establishment (e.g., Restaurant/food outlets) of their choice; 5. Outlets send back used vouchers to Sodexho for reimbursement; 6. Sodexho reimburses the store outlet is because the money received by Sodexho from its client companies is not compensation for services rendered by Sodexho but a liability/deposit for reimbursement to the participating establishments. In BIR Ruling No. DA-484-2004, Telecoms Infrastructure Corporation of the Philippines (Telicphil) was appointed attorney-in-fact of the Management Committee tasked to exercise the responsibilities, duties and powers in connection with the construction, service and maintenance of the National Digital Transmission Network (NDTN). Under the set-up, Telicphil received money from the NDTN co-workers for payment of costs related to services it rendered (Telicphil costs) which Telicphil reported as Sales for tax purposes. It also received money from the NDTN co-owners for maintenance costs of NDTN (NDTN Costs). Based on the cases of the McCann Erickson (Philippines), Inc. vs. Commissioner of Internal Revenue , C.T.A. Case No. 5966, March 13, 2003 and Commissioner of Internal Revenue vs. Tours Specialists, Inc . G.R. No. 66416 dated March 21, 1990, this Office ruled that money received from the NDTN co-owners for payment of NDTN costs are funds merely held in trust by Telicphil for eventual remittance to the supplier of goods and contractors for services . . . The money received, therefore, is not in the nature of fee or consideration for the services of Telicphil. The ruling states: "Accordingly, inasmuch as the money received by Telicphil for NDTN costs does not represent income to Telicphil, said amount, therefore, shall not likewise be subject to income tax and consequently to withholding tax." EHSITc In the case of Commissioner of Internal Revenue vs. Tours Specialists, Inc ., G.R. No. 66416 dated March 21, 1990 citing the case of Commissioner of Internal Revenue vs. Manila Jockey Club, Inc ., 108 Phil. 882, the Supreme Court declared that: "Gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit and it is not necessary that there must be a law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax Code." In the foregoing case, the Supreme Court affirmed the decision of the Court of Tax Appeals which excluded from the gross receipts of a local travel agency amounts received by the latter from foreign tourist agencies which form part of the package fee paid by the tourists but were intended or earmarked for hotel room accommodations and accordingly paid by the local travel agency to the hotels. In said case, the Court found that the hotel charges paid by the local travel agency were taken out of funds entrusted to it by the foreign tour correspondent agency. As such, the said receipts never belonged to the local travel agency, but only formed sums for payment to the hotels, without any portion thereof being diverted to its own fund. In the instant case, since the monies received by Sodexho from its clients represent advance payment to third parties and, therefore, do not redound to the benefit of Sodexho, said amounts shall not form part of its gross receipts subject to income tax that Sodexho does not claim any input tax on its payment of the face value of the used vouchers presented by participating establishments; that such amount is intended to compensate the member establishments for the meals/food items purchased by the voucher holders; that accordingly, Sodexho issues non-VAT official receipts to the client company and recognizes in its books a liability upon receipt of the payment for the face value of the vouchers; that on the other hand, the participating establishments which accepted the vouchers as payment for meal or purchase of food items issue non-VAT official receipts to Sodexho upon payment of the vouchers by Sodexho; that consequently, no input VAT is shifted to and claimed by Sodexho; that moreover, inasmuch as the employees use the vouchers as cash in their purchase of meals/food items, the participating establishments issue VAT invoices and/or VAT official receipts to the voucher holders similar to their customers; that Sodexho charges management fee to its client company; that in addition, Sodexho charges marketing fee to the participating establishments for the added turnover generated by the voucher system and for the verification of the voucher's validity and the processing, as well as monitoring, of certain percentage of the amount of sales made through Sodexho's vouchers; and that accordingly, Sodexho issues VAT invoices and/or VAT official receipts to these client companies and to the participating establishments, upon receipt of the management fees and marketing fees respectively. In reply, please be informed that Section 27(A) of the Tax Code of 1997 provides, viz : "Sec. 27. Rates of Income Tax on Domestic Corporations . "(A) In General . Except as otherwise provided in this Code, an income tax of thirty-five (35%) is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under this Title as a corporation, organized in, or existing under the laws of the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). xxx xxx xxx" Based on the foregoing, the management and service fees paid to Sodexho by its clients which are payments for services rendered in the Philippines constitute gross income subject to income tax, pursuant to Section 27(A) of the Tax Code of 1997. With regard to the amount received by Sodexho from the client companies for the face value of the vouchers and for which Sodexho shall have to issue separate non-VAT official receipts, the same does not fall within the purview of the term gross income. This imposed under Section 27(A) of the Tax Code of 1997. (BIR Ruling No. DA-238-2005 dated June 1, 2005) 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. DTIaCS Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service