BIR Ruling [DA-319-03]

September 26, 2003 BIR RULING [DA-319-03] 108 (B) (2) 346-88 Tam-Yap and Associates Unit 408, Ferros Bel-Air Tower 30 Polaris corner Durban Streets Bel-Air Village Makati City Attention: Atty. Teresa R. Tam-Yap Atty. Ryan Jan G. Cruz Gentlemen : This refers to your letter dated December 19, 2002, wherein you represented that your client, SKF Philippines Inc., (SKF Philippines) is a member of the SKF Group, one of the largest roller bearing suppliers in the world; that the parent company is Aktiebolaget SKF (AB SKF) in Goteborg, Sweden, with several regional headquarters; that the regional headquarters in the Asia-Pacific Region is SKF South East Asia and Pacific Pte. Ltd., Singapore, (SKF SEAP) which acts as a supervisory, communications and coordinating center for the affiliates of the SKF Group in the region, which includes SKF Philippines; that SKF Philippines is primarily engaged in the business of selling SKF roller bearings (bearings) within the Philippines and providing post-sales services; that one of the activities of SKF Philippines is to import SKF bearings warehoused in SKF SEAP and to sell the same to local purchasers; and that the payments thereof are directly remitted to the treasury department of AB SKF. You likewise represented that another activity of SKF Philippines is to act as agent of AB SKF, thru SKF SEAP; and that under this arrangement, SKF customers in the Philippines will purchase SKF products from SKF Philippines' mother company directly and accordingly, SKF Philippines then places the orders of the customers in the Philippines to SKF SEAP, which in turn determines where to source the goods that are placed by the Philippine customers; that under this arrangement, SKF Philippines will earn an indent commission of ten percent (10%) on all orders it places with SKF SEAP; that SKF SEAP would then facilitate the delivery of the bearings directly to the local purchaser offshore and will make the necessary arrangement for shipment of goods, FOB shipping point; that the Philippine customer (i) then pays directly to SKF SEAP prior to the shipment of the goods to the Philippines, FOB shipping point, and (ii) takes care of the release of the goods from the Bureau of Customs; and that finally, SKF Philippines, in facilitating the order, would then receive indent commissions for such activity which are paid for in acceptable foreign currency inwardly remitted to the Philippines and accounted for in accordance with the Rules and Regulations of the Bangko Sentral ng Pilipinas (BSP). ASIETa You now seek an opinion confirming your position that: (i) the sales of SKF SEAP are sales of these companies consummated abroad and therefore such sales cannot be made as part of the sales of SKF Philippines since it only receives indent commission from such activity; and (ii) the indent commission received by SKF Philippines is subject to the value-added tax of zero percent (0%), considering that it complies with the requirement of Section 108 (B) (2) of the National Internal Revenue Code of 1997. In reply, please be informed that based on the facts represented above, we confirm your opinion that such sales by SKF SEAP, though facilitated by SKF Philippines, cannot be made as part of the sales of SKF Philippines. Following the ruling in Kanematsu vs. CIR , C.T.A. Case No. 4531, March 27, 1995, it can be said that SKF Philippines is merely a broker who is generally defined as one who is engaged, for others, on a commission, negotiating contracts relative to property with the custody of which he has no concern; the negotiator between other parties, never acting in his own name, but in the name of those who employed him; he is strictly a middleman and for some purposes, the agent of both parties (Beth Meyer & Co., Ltd. vs. Nolting and Garcia, 35 Phil. 274, November 18, 1916) . The broker, unlike the commission merchant, has no relation with the thing he sells or buys. He is merely an intermediary between the purchaser and the vendor. He acquires neither the possession nor the custody of the things sold. His only office is to bring together the parties to the transaction (Pacific Commercial Co. vs. Yatco, 68 Phil. 398, July 20, 1939) . The chief feature which distinguishes a broker from other classes of agents is that it is the intermediary or middleman and, in effecting a sale or exchange of property, acts in a certain sense as the agent of both parties to the transaction. Another distinction is that the idea of exclusiveness enters into an employment agency, while in respect of a broker there is a holding out of oneself generally for employment in matter of trade, commerce and navigation and on this principle, a broker is distinguished from a clerk (12 C.J.S. pp. 8-9, citing cases emphasis supplied)" [Kuenzle & Streiff, Inc. vs. Commissioner of Internal Revenue, 12 SCRA 300; Collector of Internal Revenue vs. Tan Eng Hong, SCRA 431] . Hence, the sales of SKF SEAP which were placed by SKF Philippines upon the orders of the customers in the Philippines to SKF SEAP is not and should not be included as part of the sales of SKF Philippines. Under this arrangement, SKF Philippines' only role in the transaction is to place the orders thereby acting as an agent in facilitating such transaction. This Office likewise confirms your opinion that the indent commission to be received by SKF Philippines from AB SKF is subject to the value-added tax of zero percent (0%), considering that it complies with the requirement of Section 108 (B) (2) of the National Internal Revenue Code of 1997 such that the consideration for services rendered is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). (VAT Ruling No. 346-88, dated August 1, 1988) 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, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group