BIR Ruling [DA-350-06]

June 6, 2006 BIR RULING [DA-350-06] Rev Regs 17-2003; DA-113-2003 Delano M. Valera Law Office Rm. P04, Penthose, Macdouton Bldg., 768 Edsa cor. East Avenue, Quezon City Attention: Atty. Delano M. Valera S i r : This refers to your letter dated May 8, 2006 requesting in behalf of your client, Yakult Marketing Corporation, clarification that trade and sales discounts are not subject to withholding tax. It is represented that Yakult Marketing Corporation (YMC) with business address located at 1461 F. Agoncillo corner Escoda Street, Ermita, Manila grants sales and trade discounts to its Yakult Ladies who purchase from YMC, yakult products in their capacity as independent entrepreneur; that upon purchase, YMC issues sales invoices in favor of the Yakult Ladies with a trade discount deducted outright on the sales invoice of YMC; that after the end of the month, the Yakult Ladies are also given incentives in the form of sales discounts based on the sales of the Yakult products which they purchase from YMC; that both these trade and sales discounts are treated by the Yakult Ladies as purchase discount, which are deducted from their purchases or cost of sales when they file there respective ITRs; and that you opine that the trade and sales discounts were never considered as commissions paid to the Yakult Ladies, and therefore not subject to withholding tax. In reply, please be informed that Section 2.57.2 of Revenue Regulations No. 2-98 as amended by Section 3 of Revenue Regulations No. 17-2003 provides: "SEC. 3. Income Payments Subject To Creditable Withholding Tax . Sec. 2.57.2 of Revenue Regulations No. 2-98, as amended, is hereby further amended to read as follows: Sec. 2.57 2. Income payments subject to creditable withholding tax and rates prescribed thereon . Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines. xxx xxx xxx (O) Commissions of independent and/or exclusive sales representatives, and marketing agents of companies. On gross commissions , rebates, discounts and other similar considerations paid/granted to independent and/or exclusive sales representatives and marketing agents and sub-agents of companies, including multi-level marketing companies, on their sale of goods or services by way of direct selling or similar arrangements where there is no transfer of title over the goods from the seller to the agent/sales representative . Ten percent (10%)" (Emphasis ours) EaCDAT A trade discount is a deduction from the catalog or list price granted to a purchaser of goods. It encourages customers to buy in large quantities and it enables the seller to establish a different price to different customers. A sales discount, on the other hand, is an amount of the regular price of goods that is granted for early payment. This is debited when the amount of discount is granted to the buyer. 1 As gleaned from the above provision, both commissions and discounts are subject to the 10% creditable withholding tax which are paid/granted to independent and/or exclusive sales representatives and marketing agents and sub-agents of companies, including multi-level marketing companies, on their sale of goods or services by way of direct selling or similar arrangements where there is no transfer of title over the goods of the seller to the agent/sales representative. Such being the case, nowhere is it stated in the representation that the so-called Yakult Ladies are employees of Yakult Marketing Corporation. Nevertheless, trade discounts and sales discounts are not subject to withholding tax because the Yakult products are purchased by the Yakult Ladies, the ownership, of which is transferred to the same for resale. This ruling is issued based on the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. Page 4 & 10, Accounting Principles 2, Revised Edition, Herrero, et al.