BIR Ruling [DA-202-06]

April 3, 2006 BIR RULING [DA-202-06] DA 103-94; DA 049-97 Benpres Holdings Corporation 4/F Benpres Building Exchange Road, Ortigas Center Pasig City Attention: Ms . Angel S . Ong President & Chief Operation Officer Gentlemen : This refers to your letter dated March 13, 2006 stating that the Lopez Group of Companies (the Group) is an unregistered grouping of affiliated companies consisting of the following, to wit: 1. Benpres Holdings Corporation and subsidiaries 2. First Philippine Holdings Corporation and subsidiaries 3. Lopez, Inc. and subsidiaries 4. ABS-CBN Broadcasting Corporation and subsidiaries 5. Manila Electric Company and subsidiaries that the Group is not engaged in any form of business and the name "Lopez Group of Companies" is being used merely to identify the Group; that each company in the Group is a registered entity regularly engaged in business; that all of the companies in the Group have agreed to undertake corporate initiatives relating to value-added services and projects to achieve specific short and long term benefits for the entire group; that the Group has organized functional units to perform said services and to undertake said projects for the Group, as follows: 1. HR Group HSDIaC 2. Comptrollership Group 3. Corporate Communications Group 4. Risk and Crisis Management Group 5. Quality Systems Group that within the first quarter of each year, the members of the Group contribute a certain amount of money to a common fund; that these funds are collected and administered by Benpres Holdings Corporation (Benpres) and are used to finance the rendering of services and undertaking of projects by the functional units for the Group; that the services and project consist mostly of corporate programs like seminars and conferences for the employees of the companies in the Group; that the major cost components are 50% manpower and 50% program; that some of the manpower are employees of Benpres while others are retained on consultancy basis; that the funds are not used to generate profit and merely represent pooled resources co-owned by the Group members for their mutual use and benefit; and that the funds collected and costs incurred for services rendered and the projects undertaken for the Group are administered and recorded by Benpres in its books. In connection therewith, you now request for an opinion on the following 1. Whether the funds collected by Benpres from the Group members form part of the Benpres gross receipts; 2. Whether Benpres is liable for income tax on the use of the common fund to finance the services and projects of the functional units; 3. Whether the funds collected by Benpres are subject to withholding tax; 4. In the event that the funds are subject to withholding tax, whether Benpres may withhold the tax in lieu of the individual members of the Group; 5. Whether the funds collected by Benpres are subject to VAT; 6. Whether Benpres is liable to pay VAT when paying for goods and services using the common fund for the services and projects of the Group. In reply thereto, please be informed that in BIR Ruling Nos. 103-94 dated May 16, 1994 and reiterated in BIR Ruling No. DA049-97 dated January 30, 1997 , this Office ruled that ". . . IFFSI's receipt of the NAF contributions from its franchisees which 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 includable in IFFSI's gross income; hence IFFSI is not subject to income tax thereon. [see Ford Dealers Advertising Fund vs. Commission (SS TC 761, 29 AFTR 2d-539, 456]." Thus, in Commissioner vs. Tours Specialists, Inc . G . R . No . 66416 dated March 21, 1990 , the Supreme Court held that "As demonstrated in the above-mentioned case, 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." HICSTa Prescinding from. the above-cited rulings and decision, it is undisputed that any amount held in trust and do not redound to the benefits of the taxpayer is exempt from income tax and consequently from withholding tax. Since the Group is not engaged in any form of business, the funds which the Group will contribute to the common fund and collected by Benpres will not form part of the gross receipts of Benpres. SUCH BEING THE CASE, this Office holds that 1. The funds collected by Benpres from the Group members will not form part of the gross receipts of Benpres; 2. Inasmuch as the funds collected are not subject to income tax and consequently to withholding tax, Benpres is not liable for income tax on the use of the said funds to finance the services and projects of the functional units; 3. Since Benpres will not derive any income or gain from the said funds, the funds collected by Benpres are not subject to withholding tax; and 4. Considering that the Group does not sell, barter, exchange, nor lease any goods or property and neither does it render service for a fee but merely implements the administration of the functional units and is merely held as trustee for the fund thereof, it is not subject to the value-added tax (VAT) on such activity; ADScCE Finally, with respect to the purchase of goods and services by Benpres using the common fund for the services and projects of the Group, Section 105 of the Tax Code of 1997, as amended by Republic Act (R.A.) No. 9337, provides that "Sec. 105. Persons Liable . Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, render services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of the said Code. "The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of R.A. No. 7716. "xxx xxx xxx" It is clear from the foregoing circumstances, that Benpres is not liable for VAT on its purchases of goods and services, by using the common funds which it merely administers, relative to the project which it undertakes for the Group, as the VAT-registered suppliers shall issue receipts directly in the name of the Group. 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.) PABLO M. BASTES, JR. OIC-Head Revenue Executive Assistant Legal Service