BIR Ruling [DA-353-98]

July 28, 1998 BIR RULING [DA-353-98] Castro Cadiz & Carag Law Offices Suite 6B, Eisenhower Condominium No. 7 Eisenhower Street, Greenhills 1500 San Juan, Metro Manila Attention: Atty . Othelo C . Carag Gentlemen : This refers to your letter dated April 16, 1998 requesting for a confirmation of your opinion that the accommodation fee to be paid to JMJ Holdings Corporation (JMJ) by East Asia Power Resources Corporation (EAPRC) for the use of JMJ's assets as collateral or security for loans obtained by JMJ for the benefit of EAPRC is not subject to withholding tax and value-added tax although subject to income tax. It is represented that JMJ and EAPRC are both corporation, duly organized and existing under the laws of the Philippines; that pursuant to a Memorandum Of Agreement dated December 11, 1996 entered into by and between JMJ and EAPRC, JMJ obtained loans from East West Bank and Filinvest Development Corporation in its own name and used its own assets as security or collateral for said loans; that likewise, pursuant to the provisions of the Agreement, the proceeds of the loans were remitted to EAPRC for its use and benefit but with the obligation on the part of EAPRC to pay the loans and all interest thereon to the East West Bank and Filinvest Development Corporation; that as consideration for the risk taken by JMJ, EAPRC agreed to pay JMJ a stipulated accommodation fee upon the lapse of the two-year accommodation period, upon which time EAPRC shall have caused the repayment of the loans and all interest accruing thereto; and that JMJ is just a holding company and not in the regular business of acting or extending services as an accommodation party. Based on the foregoing, you now request for a confirmation of your opinion that: "1. The accommodation fee is not subject to expanded withholding tax although subject to income tax. "2. Being an isolated transaction, it is not subject to value-added tax." In reply thereto, please be informed that: 1. Under Revenue Regulations No. 2-98, implementing Section 57(b) in relation to Section 27, both of the Tax Code of 1997, only payments to persons enumerated therein are subject to the expanded withholding tax. Considering that accommodation fees are not among those specified in said regulations, such payments are not subject to the expanded withholding tax although subject to income tax. However, since the aforesaid payments are not subject to the expanded withholding tax, the payor shall render an information return on such payments pursuant to Section 68 of the Tax Code of 1997. 2. The accommodation extended by JMJ to EAPRC was not in the course of trade or business of JMJ since the latter is not regularly engaged in that line of business. The accommodation was an isolated transaction and consequently, the accommodation fee is not subject to value-added tax. (BIR Ruling No. 022-97 dated April 1, 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, then this ruling shall be considered null and void. LLcd Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue