BIR Ruling [DA-427-06]

July 14, 2006 BIR RULING [DA-427-06] DA 337-00 V.C. Mamalateo & Associates Unit 6 C, 20 Lansbergh Place 170 T. Morato Avenue corner Castor Street Quezon City Attention: Atty . Vic C . Mamalateo and Atty . Lino Ernie M . Guevara Gentlemen : This refers to your request letter dated January 25, 2006 as well as your supplemental letter dated May 24, 2006 stating that your client, CHEVRON (PHILIPPINES), INC. (CHEVRON) [formerly known as Caltex (Philippines), Inc.], a corporation organized under Philippine laws, is launching a marketing tool to be called StarCash Card which will come in P500, P1,000, P1,500, P2,000, P3,000 and P5,000 denominations; that the StarCash Card will have a one-year expiry period; that it will be issued to various high profile businesses or corporate clients like automotive or car manufacturers and dealers, electronics and the likes which can be used as a co-branded promotional tool; that the StarCash Card will also be issued to various CHEVRON retail stations strategically located all over the country for distribution to their respective customers; that the primary aim of your client in issuing the StarCash Card is to use it mainly as a marketing tool to generate additional sales for its various retail stations, which ultimately redound to the over-all profitability on the part of CHEVRON; that the StarCash Card has been launched in other countries, particularly in New Zealand, Australia and Thailand, with encouraging results in achieving the company's objectives; that the launching of StarCash Card in the Philippines is intended to duplicate its successful introduction in other countries; that this tool targets to educate and migrate business customers away from cash and towards card-based transactions, thus, facilitating repeat spending and fortifying customer loyalty; that based on experience in other jurisdictions, the issuance of the StarCash Card generates brand-seeking behavior for CHEVRON products by encouraging repeat visits of customers to different CHEVRON retail sites; that CHEVRON, with its main thrust of using the card as a marketing tool, does not expect any income from the issuance of the StarCash Cards; that the incidental revenue to be generated therefrom (which may be in the form of merchant fees or breakage or full/partial forfeiture fees) is minimal and may just be sufficient to cover the costs for the printing and issuance of the cards; that based on the foregoing features, the StarCash Card is different with the StarCard previously issued also by CHEVRON; and that unlike StarCard which is in the nature of a credit card used in purchasing goods and services from a participating CHEVRON retail station, StarCash Card is not a credit card and is equivalent to cash. Based on the foregoing representations, you now request confirmation of your opinion on the following: 1. CHEVRON will not be treated as a financing company subject to Gross Receipts Tax (GRT), for the issuance of StarCash Cards to selected corporate clients and retail stations; 2. The amount remitted by the customers to CHEVRON upon issuance of the cards will not be treated as sales subject to the 12% VAT; and 3. The amount remitted to CHEVRON will not be regarded as income payment subject to creditable withholding tax (CWT). In reply thereto, please be informed as follows: CHEVRON is not a financing company, therefore, not subject to Gross Receipts Tax . Section 2.7 of Revenue Regulations No. 9-2004 dated June 21, 2004, implementing Republic Act No. 9238 , which took effect on January 1, 2004, defines financing companies as follows: "2.7. Financing Companies . shall refer to corporations except banks, investment houses, savings and loan associations, insurance companies, cooperatives, and other financial institutions organized or operating under other special laws, which are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial, or agricultural enterprises, by direct lending or by discounting or factoring commercial papers or accounts receivables, or by buying and selling contracts, leases, chattel mortgages, or other evidences of indebtedness, or by financial leasing of movable as well as immovable properties ( R.A. No. 5980, as amended by R.A. No. 8556 ). From the foregoing circumstances, it is clear that CHEVRON is a domestic corporation engaged in the importation and sale of petroleum products as well as the manufacture of other petroleum products such as lubricants. Thus, it is not engaged in any business activity as a financing company as defined above. In the instant case, the issuance of the StarCash Cards is mainly a marketing tool to generate additional sales for CHEVRON products as the acceptability of the StarCash Cards will be limited to CHEVRON retail stations and cannot be used to purchase goods or services from other establishments or merchants. Similarly situated are BIR Ruling No. 209-99 dated December 28, 1999 and later reiterated in BIR Ruling No. DA377-00 dated September 7, 2000 , where this Office ruled 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 and the attendant administrative burden, and the charges collected by PSPC 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 fees and charges are payments 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." The StarCash Card issued by CHEVRON is equivalent to cash and is not in the nature of a credit card. CHEVRON is not in any way advancing or financing the purchases of the customers or purchasing any receivables to/from the service establishments similar to that of a credit card transaction but is merely reimbursing the retail stations upon use of the cards equivalent to the amount of goods or services purchased by the StarCash Cardholders. Consequently, CHEVRON cannot be regarded as engaging in any activity or business of financing that is subject to GRT. CHEVRON's issuance of StarCash Card is not subject to 12% Value-Added Tax (VAT) . CHEVRON is not selling any goods or services to its clients upon issuance of the StarCash Cards to the latter, thus, not subject to 12% VAT. The value-added tax will be assessed and collected on every sale, barter or exchange of properties as well as sale or exchange of service, including the use or lease of properties ( Sections 106 and 108, Tax Code of 1997, as amended by R.A. No. 9337 ). The issuance of such cards to the corporate clients and to the retail stations does not fall under the category of goods or services as contemplated under our VAT law. Note that it will be the various CHEVRON retail stations which will be selling goods or services to the customer upon the latter's use of the StarCash Card in that particular retail station. Hence, the issuance by CHEVRON of said StarCash Cards to its customers will not be subject to VAT. Being a non-VAT transaction, CALTEX will be issuing a non-VAT invoice to document the transaction. The amount received by CHEVRON from corporate clients and retail stations upon issuance of StarCash Cards will not be subject to withholding taxes . The amount received by CHEVRON from corporate clients and retail stations upon issuance of the StarCash Cards will not be subject to withholding taxes at the rate of 1% (for sale of goods) or 2% (for the sale of services) as prescribed under Revenue Regulations No. 17-2003. This is because CHEVRON is not selling any goods or services to its customers upon the issuance of the StarCash Cards to the latter as it did not part with any goods or products upon the issuance of the said cards. Neither did it render any service to the customers when it issued the StarCash Cards upon which it received the cash equivalent of the amount of the cards issued, net of discount. The StarCash Cards being issued by CHEVRON are not the goods being sold per se , but are only used as tools to facilitate the purchase of goods or services at the particular retail station of their choice. It is not CHEVRON but the particular CHEVRON retail stations, where the StarCash Cards will be eventually used by the holder thereof, which will sell the goods or services available for sale to the user or customer. The consideration received by CHEVRON when it issues the cards to its customers is not an income payment to CHEVRON, which should be subject to withholding tax. Instead, said payment received by CHEVRON is booked or recognized as a 'liability' on its part being the amount to be remitted subsequently to the particular CHEVRON retail station upon use of such card. On the other hand, the cards received by CHEVRON's clients will be booked as 'asset'. Therefore, the amount received, not being revenue or income on the part of CHEVRON, should not be subject to withholding tax. It will be the CHEVRON retail stations that will be the one to recognize income from the sale of goods or services purchased by the Starcash Cardholder from the said retail station. Thus, it is clear that CHEVRON is not the one selling its goods or services. Accordingly, since what CHEVRON received in exchange for issuing the card is not an income payment arising from the sale of goods or services to the corporate clients and retail stations, the amount received will not be subject to withholding tax. Note that, it is only in the event of non-use of the card within its validity period, or in case of breakage or loss of the cards (i.e., 'breakage income') can CHEVRON recognize income or revenue earned from the sale of said cards. In this regard, such breakage income will be recognized by CHEVRON as part of its taxable income subject to ordinary corporate income tax. Merchant fees earned by CHEVRON from the retail stations will be subject to income tax and VAT. The merchant fees equivalent to an agreed percentage of the revenue earned by CHEVRON from the retail station will be subject to the Value-Added Tax. Since the service for the amount received by CHEVRON is rendered by the latter in the Philippines to the various retail stations, the same will be subject to the 12% VAT. 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, whether in kind or cash ( Section 5, Republic Act No. 9337, in relation to Section 4.108-2, Revenue Regulations No. 16-05 ). The merchant fee is being paid by the retail stations for the services rendered by CHEVRON in assisting the retail stations to generate additional sales for CHEVRON goods and services. Likewise, the merchant fees earned by CHEVRON will be reported as part of its taxable income subject to ordinary corporate income tax. Finally, if the merchant fee is paid by a retail station which is a corporation belonging to the Top Ten Thousand Private Corporations as determined by the BIR, the same will be subject to the 2% creditable withholding tax for the supply of services. Otherwise, said payments to CHEVRON will not be subject to any withholding tax. WHEREFORE, in view of the foregoing premises , this Office holds that 1. CHEVRON will not be treated as a financing company subject to the GRT for the issuance of StarCash Cards to selected corporate clients and retail stations. 2. The issuance of said StarCash Cards by CHEVRON to its customers will not be subject to VAT. Being a non-VAT transaction, CHEVRON will be issuing a non-VAT invoice to document the transaction. 3. CHEVRON is neither a supplier of goods or services upon issuing the cards to a Top Ten Thousand Private Corporation subjecting the payment thereof to the corresponding withholding tax on the supply of goods or services. 4. The merchant fees earned by CHEVRON from the retail stations are subject to the 12% VAT. 5. Finally, the merchant fees paid by a retail station which is a corporation belonging to the Top Ten Thousand Private Corporations will be subject to the 2% creditable withholding tax for the supply of services as prescribed in Revenue Regulations No. 17-2003. Otherwise, said payments to CALTEX will not be subject to any withholding tax. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service