BIR Ruling [DA-316-03]

September 29, 2003 BIR RULING [DA-316-03] Art. 1868 Civil Code VAT Ruling No. 002-89 Diaz Murillo Dalupan (L.C. Diaz & Co.) 5th Floor, Don Jacinto Building Dela Rosa corner Salcedo Streets Legaspi Village Makati City Attention: Atty. Millard M. Manseguiao Director & Tax Corporate Services Division Gentlemen : This refers to your letter dated April 8, 2003 stating that your client, ASPAC International Airfreight, Inc. (ASPAC) is a domestic corporation with postal address at 707 Columbia Airfreight Complex II, Ninoy Aquino Avenue, Paraaque City; that on the other hand, UPS Yamato Company Ltd., is a foreign corporation engaged in business as international cargo carrier; that ASPAC and UPS Yamato Company Ltd. entered into an Agency Agreement whereby both parties agree "(T)o utilize one another as sales agent for air freight between the country of Japan and Philippines and also to make necessary destination services including break bulk, customs clearance, transfer arrangement and other relevant executions, all for the purpose of expanding business scale for both parties by providing a distinctive service in the due course of whole operation. Accordingly, both parties hereby agree that a common purpose is to attain a fair satisfaction from those esteemed customers in both countries by a successful collaboration." that pursuant to said Agreement, Yamato Global Freight Co. (Yamato Global), a foreign carrier with principal office address at LTC, 1-2-15, Ohdenma-cho, Nihonbashi, Chuo-ku, Tokyo 103, Japan accepts cargo from clients in Japan for shipment to the Philippines under a COD arrangement whereby payment of freight is made by the consignee in the Philippines upon receipt of the cargo; that since Yamato Global of Japan does not have a branch in the Philippines, it designated ASPAC to be its agent in delivering the cargo from the airport to the local consignee; that as agent of Yamato Global, ASPAC collects freight charges plus collection charge fee from the consignee; that while the collection charge fee equal to 5% of the freight service charge is receipted/invoiced by ASPAC and recognized as revenue, the collection freight charge remitted to Yamato Global is evidenced only by a credit memo and is not recognized as revenue; that a sample of such credit memo is shown below: aDHScI Freight JPY 408,240 @ .0084 188,950.02 Service Charges: Collection Charge Fee JPY 408,240 @ .0084 @ 5% 9,447.45 Total Amount Due to ASPAC PHP198,397.47 that in the above figures, ASPAC collects P198,397.47 from the consignee and remits to UPS Yamato, Japan, the amount of P188,950.02 and retains and recognized as revenue only P9,447.45; that lately, the Revenue District Office (RDO) of Batangas advised the local consignee to demand a receipt from ASPAC for the entire amount of P198,397.47 which the latter cannot agree to because it will complicate its recognition of revenue for both VAT and income tax purposes; and that as a passed-through receiver of the freight charge in behalf of UPS Yamato, it cannot be made liable for these taxes on the amount remitted to Yamato Global on the basis of a technicality that ASPAC issued its own invoice. Based on the foregoing representations, you now request confirmation that in lieu of a VAT invoice, the airway bill issued by UPS Yamato showing the name of the consignor and the consignee, be allowed to stand as proof of payment of freight charges to Yamato, Japan; and that, only the collection fee shall be receipted and recognized as taxable income by ASPAC. In reply thereto, please be informed that Section 2 of Revenue Regulations No. 6-78, as amended by Revenue Regulations No. 15-2002, provides that the gross freight charges in the airway bills, bills of lading and/or value of tickets sold by each international carrier doing business in the Philippines shall be prima facie evidence of its gross lifted revenue. Accordingly, the airway bill issued by UPS Yamato shall be allowed to stand as proof of payment of freight charges made by ASPAC to Yamato, Japan. On the issue of collection fee being collected by ASPAC, this Office in VAT Ruling No. 002-89 dated May 19, 1989 has ruled that ". . . , since you are engaged in business as an agent within the purview of the law on Agency (Art. 1868, Civil Code) , you are subject to value-added tax based on your gross receipts pursuant to Section 102 of the Tax Code, as amended. The term "gross receipts" refers to your compensation for services rendered, hence, does not include amounts received but only held in trust for your principal. DHIaTS "Amounts held in trust . . . do not form part of the taxable gross receipts . . . " (Tours Specialists, Inc. vs. CIR, CTA Case No. 3111, Nov. 18, 1983, citing Manila Jockey Club, Inc. vs. Col. of Int. Revenue, G.R. No. L-13887, 108 Phil. 821) xxx xxx xxx "Inasmuch as being an agent, you only represent your principal your collections from tickets and airway bills sold do not form part of your taxable gross receipts as the same are collected and held in trust for and in its behalf. In short, the same is not your revenue but rather that of your principal. Hence, your taxable gross receipts (is) limited to 3% compensation for services rendered. Furthermore, it appears that you deduct your compensation from the sales proceeds of tickets and airway bills sold and remit to your principal on monthly basis. Thus, said compensation is taxable as your receipts during the taxable quarter in which collections of sales proceeds were made." Such being the case, considering that ASPAC merely holds the freight service charges for and in behalf of its principal, UPS Yamato, the same should not be included in its gross receipts for purposes of value-added tax and income tax. It is only the collection fee of 5% based on the freight charges that should be recognized as revenue for ASPAC includible in its gross receipts. 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. ISADET Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group