BIR Ruling [DA-519-05]

December 22, 2005 BIR RULING [DA-519-05] Revenue Regs. No. 17-2003; DA-360-2004 SGV & Co. 6760 Ayala Avenue 1226 Makati Attention: Atty. Romulo S. Danao, Jr. Partner, Tax Services Gentlemen : This refers to your letter dated August 2, 2005 requesting in behalf of your client, Taisho Pharmaceuticals (Phils.), Inc . ("TPPI"), for confirmation of your opinion on the tax implications of the following: (1) Section 2.57.2 (O) of Revenue Regulations ("RR") No. 02-98, as amended by Section 3 of Revenue Regulations ("RR") No. 17-2003 only applies to rebates, discounts and other similar considerations paid/granted where there is no transfer of title over the goods from the seller to the agent/sales representative but does not apply to rebates, discounts and other similar considerations paid/granted where there is transfer of title over the goods from the seller to the agents/sales representatives as in a straight sale of Lipovitan products by TPPI to the distributors and the latter's sale to the outlets; (2) The distribution margin granted by TPPI to its independent distributors, being in the nature of sales discount, is not subject to the 10% creditable withholding tax imposed under Section 2.57.2 (O) of RR No. 02-98, as amended by Section 3 of RR No. 17-2003; (3) The said distribution margin, being in the nature of discount granted at the time of sale, and indicated as a separate item in the sales invoice, shall be allowed as deduction from TPPI's gross selling price for Value-Added Tax (VAT) purposes. It is represented that TPPI is a domestic corporation principally engaged in the manufacture and sale of Lipovitan products in the Philippines. It imports the raw materials used in the production of Lipovitan products. It engages the services of Taisho Hizon Manufacturing, Inc. ("THMI") to process and manufacture TPPI's raw materials into finished products; that TPPI pays tolling/service fees to THMI. TPPI owns the finished products until the products are sold to the independent distributors. Based on the various distribution agreements submitted by TPPI to this Office, it appears that TPPI entered into distribution agreements with various independent distributors for the distribution of Lipovitan products in the Philippines. Under the terms of said distribution agreements, the Lipovitan products shall be purchased by the distributors from TPPI at mutually agreed trade prices, less the distribution margin of thirteen percent (13%). The distribution agreements also provide that the margin allowed for the distributor shall cover credit terms and financial discounts that are normally extended in the trade. The distribution agreements further provide that the distributors are independent contractors and are not considered agents or legal representatives of TPPI and that title and risk to the products shall pass to the distributors upon delivery to, and acceptance by, said distributors of the said products. Moreover, it is explicit in the distribution agreements that the distributors shall issue their own official receipts, sales invoices, cash invoices, delivery receipts, sales order forms and receipts, and other necessary documents for the purpose of selling, retailing and distributing the said product. It is further represented that Lipovitan products are sold by distributors to the outlets at cost plus a certain mark-up but within the Suggested Retail Price recommended by TPPI in order to protect their market. It is likewise represented that TPPI treats and records the distribution margin given to distributors as sales discounts in its books of accounts and that the distribution margin or discount is indicated as separate item in the sales invoice that is issued to the distributors. The distribution margin or discount is granted outright to the distributors at the time of sale and not dependent on any condition. SHAcID In reply thereto, please be informed that your opinion is hereby confirmed as follows: (1) Section 2.57.2 (O) of RR No. 02-98, as amended by Section 3 of RR No. 17-03, clearly provides thus: "O) Commissions of independent and/or exclusive sales representatives, and marketing agents of companies On gross commissions, rebates, discounts and other similar considerations paid/granted to independent and/or exclusive sales representatives and marketing agents and sub-agents of companies, including multi-level marketing companies, on their sale of goods or services by way of direct selling or similar arrangements where there is no transfer of title over the goods from the seller to the agent/sales representative . Ten percent (10%)" Thus, rebates, discounts and other similar considerations paid/granted to independent and/or exclusive sales representatives and marketing agents and sub-agent of companies where there is no transfer of title over the goods from the seller to the agent/sales representative are subject to the 10% CWT. However, in straight sales transactions where there is transfer of title over the goods from the manufacturer/seller to the distributors and then to the retail outlets, supermarkets and grocery stores, rebates, discounts and other similar considerations are not subject to the 10% CWT. In BIR Ruling No. DA-360-04 dated June 28, 2004, this Office had interpreted Section 2.57.2 (O) of RR No. 02-98, as amended by Section 3 of RR No. 17-03, as follows: "Thus, the commission and bonus paid by the Distributors to their Managers for meeting their group sales are subject to the expanded withholding tax at the rate of ten percent (10%) pursuant to Section 2.57.2 (O) of Revenue Regulations No. 98, as amended by Section 3 of Revenue Regulations No. 17-2003 considering that title over the goods was not transferred from the Distributors to the Managers by virtue of the group sales. "Moreover, where there is transfer of title over the goods from the seller to the agent/seller representative the ten percent (10%) creditable withholding tax does not apply, as in the straight sales transactions of tupperware products by TPI (through TWP) to the Distributors and then to the Managers and Dealers." Prior to the amendment of RR No. 02-98 by RR No. 17-03, this Office had the occasion to rule on the withholding tax consequences of sales discounts given to distributors. In BIR Ruling No. DA-313-99 dated May 20, 1999, this Office ruled that: ". . . Revenue Regulations No. 2-98 [formerly Revenue Regulations No. 6-85, as amended] implementing Section 57(B) of the Tax Code of 1997 [formerly Section 50(b) of the Tax Code, as amended], payments only to persons enumerated therein are subject to the expanded withholding tax. Since payments of purchases by these independent entrepreneurs to IGPC are made on cash basis or thru their major credit cards, hence a direct sale , and since these individuals are not employees, agents nor commercial brokers of IGPC, said individuals are therefore considered independent distributors. Consequently, payments by IGPC to its independent distributors in the form of "Additional Sales Discounts" and "Break Away Bonus" are not payments to commercial brokers. Hence, said payments are not subject to the expanded withholding tax because they are not among those specified in the above said Regulations ." (Emphasis supplied) Considering the foregoing, we hereby confirm your opinion that the discount, in the form of distribution margin, granted to independent distributors and exclusive sales representatives who take title to the products, as in a straight sale of Lipovitan products by TPPI to the distributors and the latter's sale to the outlets, is not subject to 10% CWT. The distribution agreements between TPPI and its independent distributors establish and prove that genuine or true sale transactions exist between TPPI, as the seller of the Product, and the distributors, as wholesale buyers. The title to the Products sold to the distributors passes to the distributors upon delivery of the products to, and acceptance by, the distributors, and the distributors are required to pay the purchase price of the goods they ordered from TPPI upon issuance of the invoice ( Quiroga vs. Parsons 30 Phil. 501 ). EaICAD In addition, the distribution agreements between TPPI and its independent distributors reveal the intention of TPPI to give sales discount to its distributors. As cited in your letter, TPPI and the distributors recognize in the distribution agreements that the distribution margin shall cover credit terms and financial discounts that are normally extended in the trade. Since a true and straight sale transactions exist between TPPI and the independent distributors, similar to any other sales transactions, the discounts and other similar considerations granted by TPPI to its distributors are not subject to withholding tax under Section 2.57.2 (O) of RR No. 2-98, as amended by RR No. 17-2003 (BIR Ruling No. DA-360-04 dated June 28, 2004). Accordingly, we hereby confirm that the distribution margin granted by TPPI to its independent distributors, being in the nature of sales discount, is not subject to the 10% creditable withholding tax imposed under Section 2.57.2 (O) of Revenue Regulations No. 2-98, as amended by Section 3 of Revenue Regulations No. 17-2003. Furthermore, Section 106(D)(2) of the 1997 Tax Code provides that: "(D) Sales Returns, Allowances and Sales Discounts . The value of goods or properties sold and subsequently returned or for which allowances were granted by a VAT-registered person may be deducted from the gross sales or receipts for the quarter in which a refund is made or a credit memorandum, or refund is issued. Sales discount granted and indicated in the invoice at the time of sale and the grant of which does not depend upon the happening of a future event may be excluded from gross sales within the same quarter it was given ."(Emphasis supplied) This Office, in several occasions, had consistently ruled that sales discount given by a VAT-registered person should be excluded from its gross sales for purposes of determining its output VAT liability when said discount is indicated as separate item in the invoice and the same is determined or granted at the time of sale. (VAT Ruling No. 002-92 dated March 3, 1992; VAT Ruling No. 068-91 dated July 5, 1991; VAT Ruling 204-90 dated October 16, 1990). Conversely, discounts given, but the enjoyment of which is conditioned upon the subsequent happening of an event or the fulfillment of certain conditions imposed by the seller, can not be deducted from gross sales for VAT purposes, e.g., prompt payment discount or a discount to be given if the purchase price is paid upon delivery or a discount to be given if the buyer pays within seven days after delivery ( Goldstar Philippines Sales Corporation vs. Commissioner of Internal Revenue , CTA Case No. 5715 dated May 11, 2005). Accordingly, since the discounts, in the form of distribution margin, granted to the distributors are determined by TPPI at the time of sale, and that the discounts or distribution margin are expressly and separately indicated as sales discount or distribution margin in the sales invoices issued by TPPI to its distributors, and that the grant of sales discounts or distribution margin to the distributors of TPPI is not dependent upon the happening of a future event or upon the fulfillment of a certain condition, we hereby confirm your opinion that the discounts or distribution margin are deductible from TPPI's gross selling price or gross sales for purposes of determining TPPI's output VAT liability. 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. Very truly yours, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue