BIR Ruling [DA-337-00]

September 7, 2000 BIR RULING [DA-337-00] 105; 108 (A); 209-99 SGV & CO. 6760 Ayala Avenue 1226 Makati City Attention: Mr . Joel L . Tan-Torres Partner, Tax Division Gentlemen : This refers to your letters dated June 14, 2000 and August 29, 2000 requesting, on behalf of your client, Caltex Philippines, Inc . ("Caltex"), for a confirmation of your opinion that the merchant fees and other service charges that it receives from dealers and cardmembers, respectively, are subject to the 10% value-added tax (VAT) under Sections 105 and 108(A) and not to the 5% gross receipts tax (GRT) under Section 122, all of the Tax Code of 1997. It is represented that Caltex is a corporation duly organized and existing under the laws of the Philippines and primarily engaged in the business of manufacturing petroleum products; that as part of its marketing strategy, it shall implement a new "StarCard Program" ("Program") by the latter part of this year; that under the Program, Caltex shall issue fleet cards to customers (i.e., corporate and individual accounts), which cards may be presented to any Caltex station for the purchase of fuel or non-fuel products, vehicle maintenance services and various items from the StarMart stores; that the Program shall be implemented as follows: On the Part of the Cardmember 1. The Caltex StarCard client ("cardmember") makes a purchase of fuel or non-fuel products or avails of services at any Caltex Station. 2. The Caltex station dealer issues an official receipt and card transaction slip to cardmember upon completion of credit card sale. This transaction is electronically transmitted to Caltex. 3. Caltex generates a monthly billing statement to the cardmember. 4. The cardmember makes a full payment to Caltex or any accredited payment center on or before the 15th day of every month. On the Part of the Caltex Station Dealer 1. Caltex or its designated bank reimburses the Caltex station dealer for purchases of goods and services made by the cardmember. 2. Caltex shall deduct a pre-determined rate called "merchant fees." 3. Caltex pays the Caltex station dealer seven (7) days from the transaction date upon complete submission of merchant slips to Caltex. that the merchant fees is a form of commission charged to the dealers for brokering the sale and to cover the administrative and handling fees, credit risk, inventory, terminal fee and maintenance costs of Caltex in settling the accounts of the cardmembers; that the merchant fees are automatically deducted from the payment made to the Caltex station dealer at the point of sale and thus, the Caltex station dealer is reimbursed net of the merchant fees; that Caltex shall also collect annual and joining fees from its cardmembers; that the fees may be waived (lifetime or first year) based on the volume generated by the cardmember; that to encourage cardmembers to pay their bills on time, charges are collected for late payment, underpayment, and erroneous payment; that charges are reversed if fault is attributable to Caltex or the payment center; that in view of account maintenance, other fees and charges may also be collected such as penalty charges, reactivation charges, card processing and handling fees, replacement costs, charges for delinquent accounts, and interest on deferred payment, if said option was availed by the client; that Caltex may grant rebates to client depending on the volume of sales; that in recognition of cardmembers' loyalty, cardmembers may be entitled to bonus points that come in kind (fax machines, travel tickets, etc.) for their continued patronage of Caltex products and services; that the merchant fees to be subject to VAT are being collected from the Caltex station/dealers; that these fees are for services rendered by Caltex to these dealers; that the services rendered by Caltex to these dealers include promotion and marketing, collections from cardmembers and remittance of payments to the dealers; that the primary objective of the StarCard program is to improve the marketing or sales of the dealers; that accordingly, payments of merchants fees by the dealer to Caltex can be viewed as to partake of fees or commissions for services rendered by Caltex in assisting the dealers increase its sales; that the use of the cards by the cardmembers are to purchase goods and services and are limited to those sold by participating Caltex station/dealers; that unlike the StarCard which usage is limited to the Caltex Station dealers, the cards issued by credit card companies can be used for several establishments/retailers on a non-exclusive basis; and that the StarCard is primarily directed to increase the sales of the Caltex dealers/stations. TIaCAc In reply, please be informed that Sections 105 and 108 (A) of the Tax Code provides as follows: "SEC. 105 Persons Liable . Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax imposed in Sections 106 and 108 of this Code." xxx xxx xxx "SEC. 108 Value-added Tax on Sale of Services and use or Lease of Properties . There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of the gross receipts derived from the sale or exchange of services, including the use or lease of properties. The phrase "sale or exchange of services" means the performance of all kinds of services in the Philippines for others for a fee, remuneration, or consideration, . . ." The merchant fees and other fees paid by the Caltex station dealers to Caltex for rendering brokering and other administrative services with respect to the purchases made by the cardmembers with the view of generating higher sales for Caltex products and services; and the fees and charges collected from cardmembers representing annual and joining fees, penalty charges, card processing and handling fees, replacement costs, charges for delinquent accounts, and others, shall be considered as payments for services rendered in the Philippines. Thus, the same shall be subject to the 10% VAT prescribed under Section 108 of the Tax Code of 1997. Accordingly, since the merchant fees and other charges are payments for services rendered in the Philippines and Caltex is not a financing company, the 5% gross receipts tax prescribed under Section 122 of the Tax Code of 1997 shall not be imposed. The above situation is very much similar to BIR Ruling No. 209-99 dated December 28, 1999 involving merchant fees paid to Pilipinas Shell Petroleum Corporation (PSPC) wherein this Office held that: "The merchant service fees paid by the Shell dealers to PSPC for brokering the sale, helping generate higher sale, and for assuming the risk of collecting from the Fleet Cardholders which represent various fees such as annual fees, joining fees, late payment penalties and others, shall be considered as payments for services rendered in the Philippines. Thus, the same shall be subject to the 10% VAT prescribed under Section 108 of the Tax Code of 1997." "Accordingly, since the merchant service fee and charges are payment for services rendered in the Philippines and PSPC is not a financing company, the 5% gross receipts tax prescribed under Section 122 of the Tax Code of 1997 shall not be imposed." 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. TCaAHI Very truly yours, (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group