BIR Ruling [DA-507-06]

August 22, 2006 BIR RULING [DA-507-06] Rev. Regs. 2-98; DA-484-2004 Aboitiz Transport System Corporation 12th Floor, Times Plaza Building, United Nations cor., Taft Avenue Ermita Avenue, 1000 Attention: Mr. Ismael R. Cabonse Government Relations Manager Gentlemen : This refers to your letter dated June 27, 2006 requesting for a confirmation of your opinion on the withholding tax implication of the shared costs charged by Aboitiz Transport System Corporation to its subsidiaries and affiliates within the Aboitiz Transport Group. It is represented that the Aboitiz Transport System Corporation (ATSC) is a domestic shipping company engaged in the passenger transport and cargo liner services, plying major routes and principal ports across the Philippine archipelago; that to facilitate purchases that are common among the Aboitiz Transport Group (ATG) companies and to optimize ATSC's connection with its suppliers of goods and services, there are instances where certain purchases are centralized with ATSC; that experience has it that requiring your suppliers to invoice separately the costs borne by each ATG company proved to be complex and confusing on the part of the suppliers; that most of the suppliers do not want to deal with multiple customers for a single transaction; that in these cases, the supplier's invoices and/or receipts are issued in the name of ATSC; that ATSC then pays in advance the full amount billed by the supplier; that for expediency, considering that it is ATSC making the payment to the supplier and the supplier recognizes only ATSC as its customer, ATSC also withholds in full the applicable withholding tax on the purchases, remits the same to the BIR and issues the corresponding withholding tax certificate to the supplier; that in its books, ATSC records the amount of expense/asset to the extent of its share only the balance (i.e., the shared cost) charged as receivable from its subsidiaries and affiliates; that the subsidiaries and affiliates of ATSC, on the other hand, recognize expense/asset only to the extent of their respective share; and that they also withhold the corresponding withholding taxes on their payments to ATSC. Based on the foregoing, you requested for a confirmation of your opinion that: 1. The payments received by ATSC from its subsidiaries and affiliates for the latter's share in the common purchases are not income on the part of ATSC, hence, should not be subjected to withholding tax by its subsidiaries and affiliates; 2. Considering that ATSC has control over the payment to suppliers, the withholding of taxes by ATSC on the entire payment to suppliers, in lieu of its subsidiaries and affiliates for their respective share, and the remittance thereof to the BIR is deemed substantial compliance with the withholding tax requirements insofar as the correct amount of taxes were withheld and remitted to the government. Hence, the said remittance may be credited to the account of ATSC subsidiaries and affiliates, as actual payors. IaAScD In reply to the following, we proceed to rule as follows: Firstly, the payments received by ATSC from ATG for the latter's share in the common purchases are not subject to withholding tax as these are funds merely held in trust and not in the nature of a fee or consideration by ATSC's services but instead for eventual remittance to the supplier of goods and services. The same do not fall within the definition of gross receipts under Section 108 of the Tax Code of 1997. Further, in the case of Commissioner of Internal Revenue vs. Tours Specialists, Inc. and The Court of Tax Appeals , 183 SCRA 402, the Supreme Court held that gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit; and it is not necessary that there must be a law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax Code. Accordingly, inasmuch as the money received by ATSC from ATG, for the latter's share in the common purchases does not represent income to ATSC, the said amount, therefore, shall not likewise be subject to income tax and consequently to withholding tax. EcDSHT Finally, under Section 2.57.3 of Revenue Regulations No. 2-98 as amended by Section 5 of Revenue Regulations No. 30-03 dated November 12, 2003, agents or any person purchasing goods or services/paying for and in behalf of withholding agents shall likewise withhold in their behalf, provided that the official receipts of payment/sales invoices shall be issued in the name of the person whom the former represents and the corresponding certificate of tax withheld (BIR Form No. 2307) shall immediately be issued upon withholding of the tax. In the instant case, withholding and remittance by ATSC for its account of the withholding tax on gross payments made by ATG to the suppliers, insofar as the correct amount of taxes has been withheld and remitted to the BIR, shall constitute substantial compliance with the withholding tax requirements under the regulations. Thus, upon proof of the withholding and remittance of taxes by ATSC, the said amount may, therefore, be credited for the account of ATG, being the withholding agent-payor. 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service