BIR Ruling [DA-511-06]

August 25, 2006 BIR RULING [DA-511-06] DA 076-06 Rockwell Land Corporation Rockwell Drive corner Estrella Street Makati City Attention: Mr. Adolfo O. Granados Senior Vice President Gentlemen : This refers to your letter dated August 7, 2006 stating that Rockwell Land Corporation (Rockwell) is a domestic corporation duly organized and existing under the laws of the Philippines; that it is engaged in the real estate business including the management and operation of shopping malls; that Rockwell owns and operates a commercial establishment known as the Power Plant Mall (Mall), located within the Rockwell Center, which has over 200 commercial spaces which it leases to different individuals operating restaurants, shops and other retail business; that as an incident to the operation of the Mall, Rockwell incurs expenses such as water, electricity, janitorial and security services, as well as the repairs and maintenance of the common areas; that as regards water and electricity consumption, Rockwell maintains a mother meter; that to determine the individual consumption of the tenants, Rockwell also maintains sub-meters which are connected to the mother meter; that by virtue of the mother meters, the utility companies bill the total consumption of the entire Mall to Rockwell; that Rockwell advances payments not only for the consumption of utilities in the common areas but also for the consumption of the individual tenants and subsequently seeks reimbursement from the tenants by issuing billing statements; that as regards expenses for security and janitorial services, as well as for repairs and maintenance of the common areas, the different contractors or service providers receive job requests from Rockwell so that the billing statements are directed also to Rockwell; and that Rockwell then pays the contractors/service contractors and later seeks reimbursement from the individual tenants. Based on the foregoing representations, you now request confirmation of your opinion that 1. All monies received by Rockwell from its tenants at the Mall as payments for "Common Area Charges" are not subject to value-added tax (VAT) and expanded withholding tax (EWT); and 2. All monies received by Rockwell for utility and services (water, electricity, etc.) in behalf of the tenants in the Mall are not subject to VAT and EWT. In reply thereto, please be informed that in BIR Ruling No. DA076-06 dated March 3, 2006, this Office had already ruled on the matter when it said that ". . . monies received by TIP from its tenants as payments for direct utilities and services are not subject to VAT and EWT. "Reimbursement of expenses, by its very nature, is not income but merely a return of capital. As a return of capital, it is not income payment per se . Such being the case, it is not subject to income tax. "In the case at bar, the expenses directly and indirectly attributable to TPI's tenants are billed to its various tenants depending on their levels of consumption. These amounts are actually payments for such direct and indirect expenses. As such, they are not income payments subject to income and withholding tax. "In BIR Ruling No. 384-98, the BIR ruled as follows: 'In reply, please be informed that your opinion is hereby confirmed. By its very nature, reimbursements of costs are not income for they are mere returns of capital. Accordingly, said reimbursements are not subject to withholding tax prescribed under Revenue Regulations No. 2-98. (BIR Rulings Nos. UN262-95 dated July 11, 1995; UN245-95 dated July 5, 1995; 1-90 dated January 4, 1990; 345-88 dated July 20, 1988; 202-81 dated October 22, 1981 and 061-79 dated July 23, 1979)' "Accordingly, and on the basis of the foregoing, your opinion that monies received by TPI from its tenants for payments of direct utilities and services are not subject to VAT and EWT is hereby confirmed. "Furthermore, in the case of Commissioner of Internal Revenue vs. Manila Jockey Club, Inc ., 108 Phil. 821, no less than the Supreme Court categorically ruled that monies received by the Manila Jockey Club in trust for the account of the owners of winning horses do not form part of the gross receipts of the club since the same never belonged to it. Thus, the Court held: 'There is no question that the Manila Jockey, Inc., owns only 7-1/2% of the total bets registered by the Totalizer. This portion represents its share or commission in the total amount of money it handles and goes to the funds thereof as its own property which it may legally disburse for its own purposes. The 5% does not belong to the club. It is merely held in trust for distribution as prizes to the owners of winning horses. It is destined for no other object than the payment of prizes and the club cannot otherwise appropriate this portion without incurring liability to the owners of winning horses. It cannot be considered as an item of expense because the sum used for the payment of prizes is not taken from the funds of the club but from a certain portion of the total bets especially earmarked for the purpose. 'In view of all the foregoing, I am of the opinion that in the submission of the returns for the amusement tax of 10% (now it is 20% of the gross receipts', provided for in Section 260 of the National Internal Revenue Code), the 5% of the total bets that is set aside for prizes to owners of winning horses should not be included by the Manila Jockey Club, Inc.' "The same view was reiterated by the Supreme Court in the case of Commissioner of Internal Revenue vs. Tours Specialists, Inc ., 183 SCRA 402, when it ruled that monies or receipts entrusted to the taxpayer which do not belong to them or do not redound to the taxpayer's benefit do not form part of gross receipts subject to the 3% independent contractor's tax under the National Internal Revenue Code of 1977. Thus, the court held: 'Parenthetically, the room charges entrusted by the foreign travel agencies to the private respondent do not form part of its gross receipts within the definition of the Tax Code. The said receipts never belonged to the private respondent. The private respondent never benefited from their payment to the local hotels. As stated earlier, this arrangement was only to accommodate the foreign travel agencies.' "In BIR Ruling No. DA316-03, the Bureau, applying the abovementioned court pronouncements, ruled that then amounts received by a domestic corporation to be held in trust for a foreign corporation do not form part of the taxable gross receipts even for purposes of the value-added tax. Thus, the Bureau held: "Inasmuch as being an agent, you only represent your principal your collections from tickets and airway bills sold do not form part of your taxable gross receipts as the same are collected and held in trust for and in its behalf. In short, the same is not your revenue but rather that of your principal. Hence, your taxable gross receipts (is) limited to 3% compensation for services rendered. Furthermore, it appears that you deduct your compensation from the sales proceeds of tickets and airway bills sold and remit to your principal on monthly basis. Thus, said compensation is taxable as your receipts during the taxable quarter in which collections of sales proceeds were made. "Such being the case, considering that ASPAC merely holds the freight service charges for and in behalf of its principal, UPS Yamato, the same should not be included in its gross receipts for purposes of value-added tax and income tax. It is only the collection fee of 5% based on the freight charges that should be recognized as revenue for ASPAC includible in its gross receipts. "In the case at bar, TPI never benefited from the monies received from its tenants as these are ultimately payments to utility companies. The monies received by TPI exclusively pertained payments for the direct utilities and services incurred. In short, TPI never received any income from the transaction which can be subject of any tax. "Accordingly, your opinion that the monies received by TPI from its tenants as payment for Common Usage and Service Area (CUSA) expenses are not subject to VAT and EWT is hereby confirmed." Inasmuch as the above-cited ruling is in all fours similar to the instant case, this Office hereby confirms your opinion that 1. All monies received by Rockwell from its tenants at the Mall as payments for Common Area Charges are not subject to VAT and EWT; and 2. All monies received by Rockwell for utility and services (water, electricity, etc) in behalf of the tenants in the Mall are not subject to VAT and EWT. 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. caTESD Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service