BIR Ruling [DA-456-03]

December 5, 2003 BIR RULING [DA-456-03] 108; 114 (C) 265-91 Office of the Auditor Commission on Audit Government Service Insurance System San Fernando, Pampanga Attention: Ms. Celinia P. Gosioco State Auditor IV Branch Auditor Gentlemen : This refers to your letter dated August 25, 2000 requesting for clarification as to the uniform implementation of BIR Rulings relative to the 5% withholding tax deducted from the remittances made by the Government Service Insurance System (GSIS) to Prudential Life Pension Plan, Inc. (PLPI). It is represented that you required the withholding of the 5% creditable income tax from remittances made to PLPI in consideration of the promotional and marketing services PLPI rendered on the pre-need products of GSIS; that it was based on Section 2.57.2 of Revenue Regulations No. 2-98; that since PLPI is a corporation, only 5% was required to be withheld as creditable income tax from the aforesaid remittances; that the Memorandum of Agreement between the GSIS and PLPI provides that the latter has offered its services to promote, sell and market the pre-need products of GSIS; that it is your view that the said services are classified as those of marketing/insurance agent/broker and the payments thereof by the GSIS are therefore subject to withholding of creditable income tax; that this classification of PLPI's services was, however, objected to by the Regional Manager of PLPI Pampanga in his letters dated January 22 and February 11, 1999; that he claimed that PLPI is not an insurance agent but belongs to the umbrella of Securities and Exchange Commission (SEC); that you maintained that being the marketing agent of GSIS, the handling fees being remitted to PLPI whether under the Office of the Insurance Commissioner or of the SEC are considered as income of PLPI subject to the creditable withholding tax of 5%; that in September 1999, the Manager, Pre-Need Department of GSIS requested that the withholding of the creditable income tax be stopped on the basis that the handling fees being remitted to PLPI are on reimbursable basis per Section 5.1 of Annex "E" of the MOA-quoted as follows: ". . . the GSIS shall remit to PLPI an amount equivalent to Twenty five (25%) percent of the Contract Price to PLPI as reimbursement of marketing expenses of PLPI in accordance with the provisions applicable in this agreement including payments of commissions, overrides and incentives of PLPI's sales force." In reply, please be informed that according to Revenue Regulations No. 2-98, as amended, implementing Republic Act No. 8424, otherwise known as the Tax Code of 1997, only payments to persons enumerated therein are subject to the creditable withholding tax. Based on the foregoing facts, the services rendered by PLPI to GSIS, i . e ., promotion, offering, marketing and selling the plans and services of the latter, cannot be considered as services rendered by an insurance agent or adjuster, an insurance agent being any person who for compensation solicits or obtains insurance on behalf of any insurance company or transmits for a person other than himself an application for a policy or contract of insurance to or from such company or offers or assumes to act in the negotiating of such insurance while an insurance adjuster is a person who either represents the insurer or the insured in any claim negotiation. On the other hand, the services of PLPI to GSIS cover products that are more appropriately classified as pre-need products, such as memorial and educational-plans. Thus, PLPI cannot be considered as an insurance agent/broker within the purview of Section 2.57.2 of Revenue Regulations No. 2-98. Accordingly, not being included among those specified under Revenue Regulations No. 2-98, as amended, income payments made by the GSIS to PLPI for the said services are not subject to the creditable withholding tax. However, the services rendered by PLPI shall be subject to the value-added tax imposed under Section 108 of the Tax Code of 1997 pursuant to Section 114(C) of the same Tax Code, the Government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled corporations shall, before making payment on account of services rendered by contractors, deduct and withhold on its gross receipts, the value-added tax at the rate of six percent (6%), which value-added tax shall be remitted within ten (10) days following the end of the month when the withholding was made. Recapitulating, PLPI is exempt from the creditable withholding tax but it is subject to the creditable value-added tax of six percent (6%) on its gross receipts for services rendered to GSIS. 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. aIAEcD Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group