BIR Ruling [DA-238-05]

June 1, 2005 BIR RULING [DA-238-05] 038-2002; DA 484-2004 Acabar Marketing International, Inc . JMBC Bldg. Rockefeller cor. Zansibar St. San Isidro, Makati City Attention: Conchita R. Tadena Finance Manager Gentlemen : This refers to your request for a ruling on the following: 1. That the agency service fees and management fees paid to Acabar Marketing International, Inc. by its clients form part of the Company's gross receipts subject to income tax and to the ten percent (10%) value-added tax (VAT);and 2. That the amounts received by the company from its clients representing advance payment to third parties for expenses incurred in the project; that are monies which are merely entrusted to it and paid to respective third parties without any benefit to the Company; that are invoiced directly in the name of the clients by the person(s) performing the service and are not covered by the official receipts of the Company, are not part of the gross receipts of the Company for purposes of income and value-added tax. It is represented that ACABAR MARKETING INTERNATIONAL, INC. (Acabar, for short) is a domestic corporation registered in accordance with Philippine laws; that it is engaged in product promotion for various clients; that services rendered by the company include organization and management of marketing projects for the clients; that these services might entail arrangement of venue for the project, recruitment of production staff, artists and technical people, and other similar dealings; that as consideration, it receives agency service fee and management fee which vary on a case to case basis; that part of the amounts received from clients represent advance payments to third parties for expenses incurred in the project; that these amounts are invoiced directly in the name of the clients by the person(s) performing the service and are not covered by the official receipts of the company; that consequently, these are not recognized by the company as part of its gross receipts since these are monies which are merely entrusted to it and paid to respective third parties without any benefit to the company. We reply as follows: I. Section 27 (A) of the Tax Code provides: "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 percent (35%) is hereby imposed upon the taxable income derived during each taxable year from all sources within an 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 Acabar 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. Furthermore, Sec. 105, in relation to Sec. 108, both of the Tax Code provides that: "SEC. 105. Persons Liable . Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code." "SEC. 108. Value-added Tax on Sale of services and Use or Lease of Properties . "(A) Rate and Base of Tax . There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. AEIcTD "The phrase ` sale or exchange of services ' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration ..." Based on the foregoing the service and management fees paid by client companies to Acabar for product promotions fall within the above definition of gross receipts, hence, subject to 10% VAT. Pursuant to Section 113 of the Tax Code, Acabar shall issue VAT official receipts to the client companies and participating establishments upon collection of the management and service fees, respectively. II. The amounts received by Acabar from its clients representing advance payment to third parties for expenses incurred in the project; that are monies which are merely entrusted to it and paid to respective third parties without any benefit to the Company; that are invoiced directly in the name of the clients by the person(s) performing the service and are not covered by the official receipts of the Company do not represent income to Acabar and therefore shall not be subject to income tax. 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-owners 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 McCann Erickson (Philippines), Inc. vs. Commissioner of Internal Revenue C.TA. 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 the contractors of 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." 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 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 funds. In the instant case, since the monies received by Acabar from its clients representing advance payment to third parties for expenses incurred in the project and, therefore, do not redound to the benefit of Acabar, said amounts shall not form part of its gross receipts subject to 10% VAT imposed under Sec. 108 of the Tax Code of 1997. 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group