BIR Ruling [DA-206-04]

April 12, 2004 BIR RULING [DA-206-04] 57; RR 2-98 055-97 Alcatel 2270 Don Chino Roces Ave. Makati City Attention: Ms. Nilda M. Toledo Finance Manager Gentlemen : This refers to your letter dated February 14, 2002 requesting for a confirmation of your opinion that payments for the lease of residential properties not used in business are not subject to five percent (5%) creditable withholding tax (CWT). It is represented that Alcatel Philippines, Inc. ("API") is a domestic corporation incorporated on July 7, 1960; that it is wholly-owned subsidiary of Alcatel Services International B.V.,a corporation organized and existing under the laws of Netherlands; that under its amended articles of incorporation, API's primary purpose is to engage in, on its own account or as agent, any and every kind of manufacturing, contracting, construction, management, consultation, installation, maintenance, operation, development, promotion and mercantile, domestic and foreign, and to that end and for as far as may be necessary, incidental, convenient or conducive thereto and to the same extent as a juridical person might or could do or cause to be done in connection therewith to manufacture, buy or otherwise acquire, sell or otherwise deal in and dispose of any and all kinds of electrical instruments, machinery, equipment, articles and supplies; that for sometime now, API has been engaging the services of expatriates who are experts in the field of telecommunication; that the services of each expatriate are covered with an employment contract; that under the employment contract, they are entitled to salaries and other benefits as agreed by the parties; that these items of income are subjected accordingly to the applicable withholding taxes ( e.g. withholding tax on compensation, fringe benefits tax);that the expatriates staying in the Philippines for a long period of time are accommodated individually by API in leased residential properties, as hotel accommodation would be too costly; that the lease contracts entered into with third party lessors are in the name of API; that the rental cost ( i.e. , monthly rental plus other charges) of the leased residential properties is shouldered in full by API as part of the expatriates' compensation package; that it is properly subjected to fringe benefit tax; that the leased properties are used exclusively as dwelling place of expatriate employees; and that it is your view that API is under no obligation to withhold the 5% tax on gross rental payments of the leased residential properties since the same are not used in business as provided under Sec. 2.57.2(C) of Revenue Regulations No. (RR) 2-98, as amended. In reply, please be informed that Section 2.57.3 of Revenue Regulations (RR) No. 2-98, as amended, provides, viz : "Sec. 2.57.3. Persons required to deduct and withhold . The following persons are hereby constituted as withholding agents for purposes of the creditable tax required to be withheld on income payments enumerated in Sec. 2.57.2: (A) In general, any juridical person, whether or not engaged in trade or business; (B) An individual, with respect to payments made in connection with his trade or business. However, insofar as taxable sale, exchange or transfer of real property is concerned, individual buyers who are not engaged in trade or business are also constituted as withholding agents; (C) All government offices, including government-owned or controlled corporations, as well as provincial, city and municipal governments." that a juridical person regardless of whether it is engaged or not in trade or business shall be constituted as a withholding agent required to deduct and withhold income payments such as but not limited, to gross rental payments. In relation to the above-quoted provision of RR 2-93, as amended, Section 2.57.2(C) of the same Revenue Regulation further provides, viz : "Sec. 2.572. Income payment subject to creditable withholding tax and rates prescribed thereon . Except as herein otherwise provided, there shall be withheld a creditable 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 (C) Rentals On gross rental for the continued use or possession of real property used in business which the payor or obligor has not taken or is not taking title, or in which he has no equity Five percent (5%)" that rental payment is one of the items of income payments subject to creditable withholding tax. It can be inferred from the foregoing provisions of RR 2-98, as amended, that only rental payments to real property which is used in business are subject to the creditable withholding tax. In the instant case, however, since API provided housing for their expatriate employees, ( i.e. ,they are the ones who entered into a Contract of Lease and paid the rents thereof) it is considered as a fringe benefit that should be properly subjected to the fringe benefit tax, except when the housing benefit is required by the nature of, or necessary to the trade or business or when the fringe benefit is for the convenience or advantage of API, as the employer. However, it cannot be said that the residential housing units being leased by API is not used in the ordinary course of their business because said housing units are for the benefit of their expatriate employees and not to mention that such housing expense may be allowed as deduction of API from their gross income as a reasonable allowance for rentals as provided in Section 34(A)(1)(iii) of the Tax Code of 1997. HEDSCc Furthermore, API shall be constituted as a withholding agent under obligation to withhold a 5% creditable withholding tax on their rental payments considered as an item of income payable to its lessor. Accordingly, this Office regrets to inform you that your request for confirmation of your opinion that payments for the lease of residential properties for the housing of your expatriate employees is not used in business and shall be exempt from the five percent (5%) creditable withholding tax (CWT),is hereby denied for lack of legal basis. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group