BIR Ruling [DA-639-04]

December 16, 2004 BIR RULING [DA-639-04] R.R. 17-2003 RCA Management And Business Consultants Room 688 Padilla-Delos Reyes Building 232 Juan Luna Street, Binondo Manila Attention: Ms. Luisa B. Rayos Managing Partner Gentlemen : This refers to your letter stating that your client, Takachiho Philippines, Inc., is a corporation duly registered with the Securities and Exchange Commission (SEC) under SEC Registration No. CS200402593 dated February 23, 2004; that it is a 99% owned corporation by Takachiho Electric Co. Ltd. with head office in 2-7-15 Shiba, Minato-ku, Tokyo, Japan; that Takachiho Philippines, Inc. is also registered with the Philippine Economic Zone Authority (PEZA) located at Block 5, Lot 6, Laguna International Industrial Park, Mamplasan, Bian, Laguna; that as a PEZA-registered enterprise (classified as Warehousing/Logistics Service Enterprise), its main activities consist of procuring goods (electrical materials) thru importation and local purchases for resale and/or re-exporting the same to clients abroad and to Clark, Subic Economic Zones, and PEZA-registered export enterprises, which is subject to a 32% regular corporation income tax; that Takachiho Philippines, Inc. warehousing operations shall not be entitled to the special five percent (5%) gross income tax incentive in lieu of national and local taxes nor to other tax incentives under R.A. No. 7916, as amended, except tax and duty-free importation on goods to be procured by Takachiho Philippines, Inc. to be subsequently supplied to its export enterprise-clients; that when Takichiho Philippines, Inc. initially took steps to enter into business in the country, the management made thorough studies and projections on its pricing policies; that the foremost consideration was to maximize sales in volumes so they have to add a mark-up of only 2% on all products they are going to sell; that true to their policies, since they started operations on April 1, 2004, the gross income (sales which is 100% less cost of sales equivalent to 98%) of 2% is really being implemented by the company; that out of the gross income, administrative and operating expenses have to be deducted resulting to net income of 1% more or less; and that consequently, if the 1% creditable withholding tax be applied to income taxes, there will always be over deductions, which will greatly affect their income. In connection therewith, you now request for exemption from the 1 % creditable withholding tax on income payments made by the customers on their single purchases or isolated transaction of Takachiho's products. In reply thereto, please be informed that Section 3 of Revenue Regulations No. 17-2003, amending Section 2.57.2 (M) of Revenue Regulations No. 2-98, as amended, provides that "(M) Income payments made by the top ten thousand (10,000) private corporations to their local/resident supplier of goods and local/resident supplier of services other than those covered by other rates of withholding tax. Income payments made by any of the top ten thousand (10,000) private corporations, as determined by the Commissioner, to their local/resident supplier of goods and local/resident supplier of services, including non-resident alien engaged in trade or business in the Philippines "Supplier of goods - One percent (1%) "Supplier of services - Two percent (2%) "xxx xxx xxx "The term "local/resident supplier of goods" pertains to a supplier from whom any of the top ten thousand (10,000) private corporations, as determined by the Commissioner, regularly makes its purchases of goods. As a general rule, this term does not include a casual purchase of goods, that is, purchases made from non-regular suppliers and oftentimes involving single purchases . However, a single purchase which involves ten thousand pesos (P10,000.00) or more shall be subject to a withholding tax. The term "regular suppliers" refers to suppliers who are engaged in business or exercise of profession/calling with whom the taxpayer-buyer has transacted at least six (6) transactions, regardless of amount per transaction, either in the previous year or current year. The same rules apply to local/resident supplier of services other than those covered by separate rates of withholding." (emphasis supplied) "xxx xxx xxx" It is clear from the foregoing that income payments made by the top 10,000 corporations to their local/resident supplier of goods or services shall be subject to 1% or 2% creditable withholding tax, respectively. However, this rule is not without an exception because it does not include casual purchase of goods or purchases made from non-regular suppliers and oftentimes involving single purchases of less than ten thousand pesos. Considering that Takachiho Philippines, Inc. is not embraced within the term "regular suppliers" with whom the customers have transacted at least six (6) transactions in the previous or current year and considering further that the income payments made by the customers of Takachiho Philippines, Inc. are for their single purchases or isolated transactions of the latter's products involving less than ten thousand pesos, said payments are not subject to the 1% creditable withholding tax prescribed in Revenue Regulations No. 17-2003. HDIATS WHEREFORE, in view of the foregoing , this Office holds that Takachiho Philippines, Inc., as supplier of goods, is exempt from the provision of Section 3(M) of Revenue Regulations No. 17-2003 which imposes upon the top ten thousand (10,000) private corporations the duty to withhold an equivalent of one percent (1%) creditable withholding tax on their income payments to their supplier of goods involving less than ten thousand pesos. 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.) JOSE MARIO BUAG Deputy Commissioner Legal & Inspection Group