Pelaez Gregorio Gregorio & Lim

August 31, 2007 BIR RULING [DA-473-07] 108 (A) VAT Ruling Nos. 283-88; 220-90; 002-89; 036-99; DA-316-2003; DA-154-2007; DA-166-2007 Pelaez Gregorio Gregorio & Lim Padilla Building, Emerald Avenue Ortigas Center, 1605 Pasig City Attention: Atty. Vicente G. Gregorio Counsel Gentlemen : This refers to your letter dated April 3, 2007 requesting on behalf of your client, Lowe Inc ., for a clarificatory ruling that the commission income derived by your client is the only amount subject to the expanded value-added tax and income tax. It is represented that Lowe Inc. is an advertising agency which mainly derives its income from the commission and fees it receives for the advertising contracts placed by its clients (the advertisers) with media companies and for planning and supervising work done by outside contractors in connection with the creation of advertisements; that for said services, Lowe Inc. charges and/or derives an agency commission which is generally at an average rate of ten percent (10%) based on the total advertising costs and expenses paid to media and production suppliers; that a representative copy of agreements between your client and the advertiser is attached hereto as Annex "A"; that under said agreements, Lowe Inc. negotiates contracts in the name and on behalf of its clients (the advertisers); that any and all billings by media and production suppliers are issued in the name of the advertisers through Lowe Inc. who checks and validates the suppliers' billings as part of its services; that Lowe Inc. then charges the corresponding agency commission on the total advertising cost for which it invoices the advertisers together with the amount due to the media and production suppliers; that upon receipt of the total amount from the advertisers, Lowe Inc. issues official receipt and in turn remits the amount due to the production and media suppliers; and that Lowe Inc. retains the commission amount. In reply, please be informed that in the foregoing transaction, Lowe Inc. only represents its clients (the advertisers) and the billings by media and production suppliers are issued in the name of the advertisers through Lowe Inc. Said billings are merely held by Lowe Inc. in trust for its principal the advertisers. The amounts for advertising costs and expenses paid to media and production suppliers, therefore, should not form part of Lowe Inc.'s taxable gross receipts. (Tours Specialists, Inc. vs. CM. CTA Case No. 3111. Nov. 18, 1983, citing Manila Jockey Club, Inc. vs. Col. of Int. Revenue. (G.R. No. 1-13887. 108 Phil. 821) The term gross receipts under Section 108 of the Tax Code of 1997, as amended, and implemented by Revenue Regulations (RR) No. 4-2007 refers to the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits applied as payments for services rendered and advanced payments actually or constructively received during the taxable period for the services performed or to be performed for another person, excluding the value-added tax, except those amounts earmarked for payment to unrelated third (3rd) party or received as reimbursement for advance payment on behalf of another which do not redound to the benefit of the payor. The gross receipts in the foregoing transaction refers to the commission or fee for services rendered which does not include money received from the advertisers as such amounts are earmarked for payment for media and production suppliers, amounts of which are subsequently liquidated and accounted for. (BIR Ruling No. DA-316-2003 dated September 29, 2003) Such being the case, considering that Lowe Inc. merely holds the payment for media and production suppliers for and in behalf of its clients (the advertisers), the same should not be included in its gross receipts for purposes of value-added tax and income tax. It is only the commission/service fee at an average rate of 10% based on the total advertising costs and expenses paid to media and production suppliers that should be recognized as revenue for Lowe Inc. includible in its gross receipts. 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