BIR Ruling [DA-334-06]

May 22, 2006 BIR RULING [DA-334-06] R.R. No. 2-98; 17-2003; 004-04; DA-352-00 & DA-639-04 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. E.C. Alcantara Tax Division Gentlemen : This refers to your letter dated February 27, 2006, requesting in behalf of your client, AZ Contracting System Services, Incorporated (AZCSSI for brevity), for a confirmation of your opinion that the income payments made by AZCSSI's customers are not subject to Expanded Withholding Tax under Revenue Regulations (RR) No. 2-98, unless the said customers are listed as one of the top ten thousand (10,000) private corporations as determined by the Commissioner of Internal Revenue as provided under Revenue Regulation No. 17-03. The Facts, as you represented, are as follows: AZCSSI is a domestic corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines. The primary corporate purpose of AZCSSI is to "... engage, undertake in, or otherwise carry on the business of subcontracting job contracting of all types of work or services including promotion of goods and the supply of manpower services, save for recruitment activities ".For rendering subcontracting of services, AZCSSI receiving income payment from its various clients. AZCSSI is of the opinion that income payments made by its clients are not subject to Expanded Withholding Tax System in view of the fact that subcontracting of all types of work and services are not expressly provided to be subject to the same under the aforesaid tax regulations on the matter, for as long as AZCSSI's customers are not classified by the Commissioner of Internal Revenue as a top ten thousand (10,000) private corporation. In reply, please be informed that under RR No. 2-98 only payments to persons enumerated therein are subject to the expanded withholding tax. Considering that payments to subcontractors of services and works are not among those specified in the pertinent tax regulations on withholding, payments made to AZCSSI for its subcontracting services to other entities are therefore not subject to the creditable withholding tax: However, please be informed that Section 3 of RR No. 17-2003, amending Section 2.57.2 (M) of RR No. 2-98, as amended, provides that "(M) Income payments made by the top ten thousand (10,000) private corporations to their local/resident supplier of goods and local/resident supplier of services other than those covered by other rates of withholding tax . Income payments made by any of the top ten thousand (10,000) private corporations, as determined by the Commissioner, to their local/ resident supplier of goods and local/resident supplier of services, including non-resident alien engaged in trade or business in the Philippines . Supplier of goods One percent (1%) Supplier of services Two percent (2%) xxx xxx xxx The term "local/ resident supplier of goods" pertains to a supplier from whom any of the top ten thousand (10,000) private corporations, as determined by the Commissioner, regularly makes its purchases of goods. As a general rule, this term does not include a casual purchase of goods, that is, purchases made from non-regular suppliers and oftentimes involving single purchases. However, a single purchase which involves ten thousand pesos (P10,000.00) or more shall be subject to a withholding tax. The term "regular suppliers" refers to suppliers who are engaged in business or exercise of profession/calling with whom the taxpayer-buyer has transacted at least six (6) transactions, regardless of amount per transaction, either in the previous year or current year. The same rules apply to local/resident supplier of services other than those covered by separate rates of withholding tax . xxx xxx xxx." (Italics supplied) It is clear from the foregoing that income payments made by top ten thousand (10,000) private corporations, as determined by the Commissioner of Internal Revenue, to their local/resident supplier of goods or services shall be subject to 1% or 2% creditable withholding tax, respectively. However, this rule is not without an exception because it does not include casual purchase of goods or purchases made from non-regular suppliers and oftentimes involving single purchases of less than ten thousand pesos (Unnumbered BIR Ruling DA-639-04 dated December 16, 2004). Therefore, if the payor of the income payments to AZCSSI is classified as a top ten thousand (10,000) private corporation by the BIR, withholding of tax shall apply at the rate of 2%. (BIR Ruling No. 004-04 dated February 11, 2004). In addition, notwithstanding the fact that the aforesaid payments may not be subject to the withholding tax if the payor/s is not classified as a top ten thousand (10,000) private corporation, the payor/s shall nevertheless render an information return on such payments pursuant to Section 68 of the Tax Code of 1997, as amended (formerly Section 61 of the Tax Code, as amended). (BIR Ruling No. 076-93 dated March 1, 2000). However, AZCSSI shall be subject to the corporate income tax prescribed under Section 27(A) 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, this ruling shall be considered null and void. (Unnumbered BIR Ruling No. DA-352-00 dated September 28, 2000). DAHEaT Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service