BIR Ruling [DA-509-05]

December 16, 2005 BIR RULING [DA-509-05] BIR Ruling No. 098-99 Ong, Ordoez & Associates 8F, 111 Paseo de Roxas Bldg 111 Paseo de Roxas cor. Legaspi St. Legazpi Village, Makati City Attention: Ms. Catherine M. Saldi Gentlemen : This refers to your letter dated August 1, 2005 requesting for a ruling exempting your client from withholding taxes on its purchases from its suppliers of metal products. As represented, your client, INCO7 Inc. (INCO7) is a newly registered company with business related to manufacturing and trading of metal products. Based on its projections, it expects that it will be included in the Bureau of Internal Revenue's Top 10,000 Corporations. Most of its would be suppliers are the ones who sell goods on cart (wheeled wagon) or those we call "peddlers." Most of these peddlers are marginal income earners and not registered with the BIR. In reply, please be informed that only payments made to persons enumerated in Revenue Regulations No. 2-98, as amended, implementing Section 57(B) of the Tax Code of 1997, are subject to the expanded withholding tax. Since payments made by INCO7 to peddlers-suppliers of metal products are not among those specified in the said regulations, said payments are not subject to the expanded withholding tax prescribed in Revenue Regulations (Rev. Regs.) No. 2-98, as amended. On the other hand, pursuant to Section 4.99-1 of Rev. Regs. No. 7-95, the term "in the course of business" was further qualified in the light of the declared policy of the government to provide, as much as possible, an equitable relief to a greater number of taxpayers in order to improve levels of disposable income and increase economic activity. Hence, this Bureau held that "any business or businesses pursued by an individual where the aggregate gross sales or receipts do not exceed P100,000.00 during any 12-month period shall be considered principally for subsistence or livelihood and not in the course of business" (cited in BIR Ruling No. 098-99 dated July 8, 1999). Corollary to this, Section 3 of Revenue Regulations No. 11-2000 provides, viz: ADcEST "SEC. 3. MARGINAL INCOME EARNERS. 'Marginal income earners' shall refer to individuals not otherwise deriving compensation as an employee under an employer-employee relationship but who are self-employed and deriving gross sales/receipts not exceeding P100,000.00 during any 12-month period. Under this qualification, the activities of such marginal income earners are considered principally for subsistence or livelihood. As such, they are exempt from the 10% Value Added Tax (VAT) and any percentage tax imposed under the National Internal Revenue Code of 1997 since they are not considered engaged in trade or business with a view to profit for which these business taxes are imposed. Moreover, they are not required to pay registration, fee although they are required to register as taxpayers for being a possible income tax and withholding tax filers." Thus, although still required to register, marginal income earners were nevertheless exempted from the payment of registration fee as prescribed under Section 236 of the Tax Code of 1997, and from the payment of value-added tax (VAT) under Title IV, Chapter I and percentage taxes under Title V, both of the same Code pursuant to the above regulations and Revenue Memorandum Circular No. 4-98. It is the opinion of this Office that with the advent of Republic Act No. 9337, "marginal income earners" continue to be exempt from the payment of VAT even if they are considered engaged in trade or business (Section 9.236-2 of Revenue Regulations No. 16-2005). If sale or lease of goods or properties or the performance of services the gross annual sales and/or receipts of which do not exceed the amount of PhP1,500,000.00 is exempt from VAT, it follows that any individual engaged in business where the gross sales or receipts do not exceed PhP100,000.00 during any 12-month period is also exempt from VAT. In VAT Ruling No. 037-2001 dated June 13, 2001, this Office had occasion to rule that the 3% percentage tax prescribed under Section 116 of the Tax Code of 1997 does not apply to transactions exempt from the 10% VAT listed in Section 109(a) to (y) [now Section 109(A) to (U) of the same Code as it applies only to transaction/s falling under item (z) [now (V)] of said section, to wit: "(B) Exempt transactions. (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from VAT: IaEASH xxx xxx xxx (v) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts of which do not exceed the amount of One Million Five Hundred Thousand Pesos (P1,500,000.00);Provided That not later than January 31, 2009 and every three (3) years thereafter, the amount One Million Five Hundred Thousand Pesos (P1,500,000.00) shall be adjusted to its present value using the Consumer Price Index, as published by the NSO." "SEC. 116. Tax on Persons Exempt from Value-added Tax (VAT) . Any Person whose sales or receipts are exempt under Section 109(z) [now Section 109 (V)] of this Code from the payment of value-added tax and who is not a VAT-registered person shall pay a tax equivalent to three percent (3%) of his gross quarterly sales or receipts: Provided; That cooperatives shall be exempt from the three percent (3%) gross receipts tax herein imposed." In view of the foregoing, INCO7's peddlers-suppliers, who are in all probability qualified under the aforestated definition of "marginal income earners," shall continue to be exempt from the payment of VAT on their sale of goods. However, if they are not VAT-registered persons, they are now subject to the 3% percentage tax on their sale of goods pursuant to Section 109(V) of the Tax Code as amended by R.A. No. 9337 and also because unlike before, they are now considered engaged in trade or business (percentage tax is a business tax). Nevertheless, only sale of goods and services to the government subject to VAT shall be subject to the 5% withholding VAT pursuant to Section 114(C) of the Tax Code of 1997 (Section 4.114, Rev. Regs. No. 2-98, as amended). Since INCO7 is not a government entity, the sale of metal products by peddlers-suppliers to it is not subject to the 5% withholding VAT. In view of the foregoing, INCO7 shall not deduct or withhold VAT or percentage tax from the payments due to said suppliers from the sale of metal products to INCO7. 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 as null and void. IcCEDA Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service