BIR Ruling [DA-272-04]

May 17, 2004 BIR RULING [DA-272-04] R.A. 9238 & RR 30-03 Padaen Law Office 3/F, Pacific Star Building Sen. Gil Puyat cor. Makati Avenues Makati City Attention: Atty. Lily Ann V. Marcos-Padaen Gentlemen : This refers to your letter dated March 1, 2004 requesting on behalf of your client, The International Commercial Bank of China (ICBC)-Manila Branch, for a confirmation of the following opinions: 1) That the 15% or 10% withholding rate, as the case may be, on professional fees under Section 2.57.2(A) of Revenue Regulations (Rev. Regs.) No. 2-98, as amended by Rev. Regs. No. 30-2003 can only be applied after but not before the professional's current year to date gross income reaches PhP720,000.00. A: Section 38 of Rev. Regs. No. 2, as amended, otherwise known as the Income Tax Regulations provides: "Section 38. Bases of computation . Approved standard methods of accounting will be ordinarily regarded as clearly reflecting income. A method of accounting will not, however, be regarded as clearly reflecting income unless all items of gross income and all deductions are treated with reasonable consistency. All items of gross income shall be included in the gross income for the taxable year in which they are received by the taxpayer and deductions taken accordingly, unless in order clearly to reflect income such amounts are to be properly accounted for as of a different period. . . A taxpayer is deemed to have received items of gross income which have been credited to or set apart, for him without restriction. . . " Accordingly, in income taxation, income is supposed to be calculated on the basis of the taxable year unless a different period is provided by law. The correct basis in imposing the tax is the taxable income actually received at the end of the taxable year/period. For purposes of determining the taxable year or period, we refer to Section 2.57.2(A) of Rev. Regs. No. 2-98, as amended by Rev. Regs. No. 6-2001, Rev. Regs. No. 12-2001 and Rev. Regs. No. 30-2003. The same Section provides, viz : "Sec. 2.57.2. Income payments subject to creditable withholding tax and rates prescribed thereon . . . . (A) Professional fees, talent fees, etc. for services rendered by individuals. On the gross professional, promotional and talent fees or any other form of remuneration for the services of the following individuals Fifteen percent (15%), if the gross income for the current year exceeds P720,000; and Ten percent (10%), if otherwise; xxx xxx xxx Furthermore, in order to determine the applicable tax rate (10% or 15%) to be applied/withheld by the withholding agent, every individual professional/talent/corporate directors herein enumerated, shall periodically disclose his gross income for the current year to the Bureau of Internal Revenue (BIR) by submitting a notarized sworn declaration . . . duly stamped received by the BIR . . . The disclosure should be filed on June 30 of each year or within fifteen (15) days after the end of the month the professional/talent/director's income reaches P720,000, whichever comes earlier. In case his total gross income is less than P720,000 as of June 30, he/she shall submit a second disclosure within fifteen (15) days after the end of the month that his/her gross income for the current year to date reaches P720,000. The payeeprofessional/talent/director shall furnish each payor a copy of the BIR duly stamped received sworn declaration not later than five (5) days from the date of receipt by the BIR. In case of failure to submit the June 30 annual declaration/disclosure to the BIR, and to furnish the payor/s a copy thereof, the payor shall withhold the tax at the rate of 15%." Moreover, Section 2.57.4 of Rev. Regs. No. 2-98, as amended by Rev. Regs. No. 12-2001 further provides, viz : "Sec. 2.57.4. Time of withholding . The obligation of the payor to deduct and withhold the tax under Section 2.57 of these Regulations arises at the time an income payment is paid or payable, or the income payment is accrued or recorded as an expense or asset, whichever is applicable, in the payor's books, whichever comes first. The term "payable" refers to the date the obligation becomes due, demandable or legally enforceable. Provided, however, that where income is not yet paid or payable but the same has been recorded as an expense or asset, whichever is applicable, in the payor's books, the obligation to withhold shall arise in the last month of the return period in which the same is claimed as an expense or amortized for tax purposes. It would appear from the above provisions, that for purposes of withholding, the payor should deduct and withhold the proper tax at the time the income payment is paid. Whether the tax imposable is 10% or 15% would be based on the sworn declaration which was filed on June 30 or within fifteen (15) days after the end of the month the income payment reaches PhP720,000, whichever comes earlier. Nevertheless, a second disclosure should be filed when during the same taxable year income reaches PhP720,000. Failure to file the June 30 sworn declaration, would subject the income payment to the higher rate of 15%. In view of the foregoing, the 15% or 10% withholding rate, as the case may be, on professional fees under Section 2.57.2(A) of Revenue Regulations No. 2-98, as amended by Rev. Regs. No. 30-2003 can be applied even before the professional's current year to date gross income reaches PhP720,000.00 in which case said income shall be subject to 10% withholding tax unless there is failure to file the sworn declaration on June 30 in which case the income payment shall be subject to the higher rate of 15%. 2) Services rendered by lawyers duly registered with the Integrated Bar of the Philippines (IBP) are now exempt from the value-added tax (VAT). A: Section 109 of the Tax Code of 1997 as amended by Republic Act (R.A.) No. 9238 now reads: "SEC. 109. Exempt Transactions . The following shall be exempt from the value-added tax: xxx xxx xxx (cc) Services rendered by lawyers duly registered with the Integrated Bar of the Philippines (IBP)." R.A. No. 9238 was published in the Manila Standard on February 16, 2004. However, Section 7 of the same Act provides that R.A. No. 9238 shall take effect on January 1, 2004. Accordingly, services rendered by lawyers duly registered with the IBP are exempt from the 10% VAT beginning January 1, 2004. 3) Should the gross annual receipts for such services exceed Five Hundred Fifty Thousand Pesos (PhP550,000), such receipts will not be subject to percentage tax. A: To subject the amount in excess of the PhP550,000 to the 3% percentage tax would be inconsistent with the exemption of services rendered by lawyers from the imposition of VAT under Section 109(cc) of the Tax Code of 1997 as amended by R.A. No. 9238 since both the value-added and percentage taxes are taxes on the business transaction or activity and are indirect taxes which the seller may pass-on or shift to the customer who ultimately bears or assumes the burden of the tax. Hence, this Office confirms your opinion that should the gross annual receipts for such services exceed Five Hundred Fifty Thousand Pesos (PhP550,000), such receipts are not subject to percentage tax. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group