BIR Ruling [DA-313-99]

May 20, 1999 BIR RULING [DA-313-99] Issho Genki Philippine Corporation 3/F Pilipinas Kao Building 108-A E. Rodriguez Jr. Avenue Quezon City Attention: Mr . Val John E . Perez Gentlemen : This refers to your letters dated February 15, 1999 and May 11, 1999, requesting for a ruling that the Additional Sales Discounts ("ASD") and Break Away Bonus ("BAB") given by your company, Issho Genki Philippine Corporation ("IGPC"), to independent distributors are not subject to the expanded withholding tax. It is represented that IGPC is engaged in the distribution of a food supplement, using multi-level networking scheme; that it contracts with individuals (through a Distributor Authorization Agreement) to distribute its product; that individuals submit an application to become a distributor; that these individuals may be sponsored by an existing distributor; that only upon evaluation and approval will these individuals become authorized distributors and provided with identification numbers for control and business kit containing instructional tapes, brochures, books and products from IGPC; that duly authorized distributor may purchase any quantity of products distributed by IGPC in any of the now 12 IGPC business centers nationwide; that payment of purchases by the said "independent distributor" to IGPC are made on cash basis or thru their respective major credit cards; that these individuals are independent private entrepreneurs who are not employees, representatives nor agents of IGPC; that these independent distributors are not commercial brokers of IGPC; that IGPC does not exercise control over these individuals in terms of time and the method of disposing the company's product; that these individuals do not assume any responsibility or obligation that may bind the company; that they distribute the company's product at their own account, through personal selling and/or sponsoring others to become the company's distributors; that these individual distributors receive a so-called ASD and/or BAB, as the case may be, upon reaching a certain withdrawal volume from the company; that the ASD and the BAB is given in cash; that the ASD is given to a distributor based on the aggregate volume of his own personal and his group's monthly purchases combined; that the BAB, is given to a distributor who has reached the level called "Executive Distributor" after having so many number of distributors under his sponsorship; that like the ASD, the BAB is based on the aggregate of volume of withdrawal from the company; that the two incentives are basically a reward given upon hitting a certain volume purchases from the company. In reply, please be informed that Revenue Regulations No. 2-98 [formerly Revenue Regulations No. 6-85, as amended] implementing Section 57(B) of the Tax Code of 1997 [formerly Section 50(b) of the Tax Code, as amended], payments only to persons enumerated therein are subject to the expanded withholding tax. Since payments of purchases by these independent entrepreneurs to IGPC are made on cash basis or thru their major credit cards, hence a direct sale, and since these individuals are not employees, agents nor commercial brokers of IGPC, said individuals are therefore considered independent distributors. Consequently, payments by IGPC to its independent distributors in the form of "Additional Sales Discounts" and "Break Away Bonus" are not payments to commercial brokers. Hence, said payments are not subject to the expanded withholding tax because they are not among those specified in the above said Regulations. 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. [BIR Ruling No. 090-98 dated June 15, 1998; BIR Ruling No. 042-96 dated March 21, 1996]. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group