BIR Ruling [DA-649-06]

November 2, 2006 BIR RULING [DA-649-06] DA No. 288-03; BIR Ruling 019-05 Pilipinas Shell Petroleum Corporation 156 Valero Street, Salcedo Village Makati City Attention: Atty. Nimfa G. Dimailig Manager Tax Planning and Advocacy and Atty. Nigel T. Avila Country Tax Manager Gentlemen : This refers to your letter dated September 15, 2006 stating that Pilipinas Shell Petroleum Corporation (Shell) is a domestic corporation primarily engaged in the manufacture, distribution and marketing of petroleum products in the Philippines; that as part of its marketing strategy to ensure continuous expansion in the fleet segment, it launched the Fleet Card Program and issued Fleet Cards to selected corporate customers; that in turn, these corporate customers distributed the Fleet Cards to its employees; that the Fleet Cards are acceptable only to Shell participating retailing stations throughout the Philippines for the purchase of fuels, lubricants and greases, vehicle maintenance services and items from Select Stores; that a Shell Card Fleet Plus Cardholders Agreement between Shell and customer and a Fleet Card Dealer Agreement between Shell and retail stations dealer/operator were put into place to effect the program. Shell Card Fleet Plus Cardholder Agreement The Cardholder agreement is an agreement entered into between Shell and a third party that has a number of company-owned or company supported vehicles; that in line with this agreement: (a) Shell issues an agreed number of Fleet Card to the company-designated employees; (b) Company designated employees would purchase from designated Shell retail station petroleum products, Select items and services and charge such purchase to the Fleet Card; (c) Shell shall purchase all receivables at gross or the face value of the invoice issued by the retail station arising from the transaction with Fleet Cardholders giving the former a right to collect from third-party company; and (d) Shell undertakes the preparation of the Statement of Account to the card members, which becomes the basis for the payment of receivables. Fleet Card Dealer Agreement The Fleet Card Dealer Agreement is a contract between Shell and the retail service stations located throughout the Philippines; that pursuant to said agreement, the retail station is required to: (a) Honor the Fleet Card issued by Shell by selling products or services to cardholders on credit; ISTDAH (b) Issue its own official receipt and card transaction slip to the cardholders; (c) Transmit daily all Fleet Card transactions to the Fleet Card Center of Shell through a Settlement Function (the procedures required of and carried out by the dealer via an Electronic Draft Capture Terminal (EDC) and a Printer or an OCR or POS Console for purposes of transmitting data or transaction to Shell to enable Shell to make settlement to the dealer; and (d) Present to Shell the Imprinter Receipt, a document to evidence transaction produced by a mechanical devise which is manually activated to capture data of each transaction (Imprinter). On the other hand, Shell's responsibilities under the agreement include the following: (a) Purchase without recourse all receivables of Shell retail stations arising from Fleet Card transactions and pay the retail station within seven (7) days from transaction date upon complete submission of transaction slip to Shell; (b) Generate a billing statement representing fuels and other purchases plus other charges (joining fees, late payment charges. annual fees, etc.) to the Fleet Card customers on a monthly basis. Based on the foregoing representations, you now request confirmation of your opinion that 1) payments received by Shell from Fleet Cardholders as payment for trade receivables purchased from retail station are not subject to withholding tax; 2) tax withheld are tax advances which can be credited against the tax liability of Shell; and 3) the issuance by Shell of a non-VAT official receipt and an electronic Statement of Account on payments received from the Fleet Card customers is a valid support for the latter's claim for input VAT credit. In reply thereto, please be informed that with respect to your first and second queries, your opinion is hereby confirmed as follows: 1) An income payment is subject to the expanded withholding tax if the following conditions concur: a) An expense is paid or payable by the taxpayer; which is income to the recipient thereof subject to income tax; (Sec. 2.57.4, Rev. Reg. No. 2-98, as amended) b) the income is fixed or determinable at the time of payment; (Sec. 199, Rev. Reg. No. 2) c) The income is one of the income payments listed in the regulations that is subject to withholding tax; (BIR Ruling No. DA238-04 dated May 7, 2004) d) The income recipient is a resident of the Philippines liable to income tax; and e) The payor-withholding agent is also a resident of the Philippines. (pp. 383 Philippine Income Tax 2004 edition, V.C. Mamalateo) aSATHE The rationale of the withholding tax system is that taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. It ensures advance partial remittance of income payments due from the income recipient. In applying the above principle in the instant case, it is clear that the two elements of withholding are absent. i.e., the payment by the Fleet Cardholders to Shell must he income to Shell and two, the income payment must be one of those listed by the tax authorities that is subject to withholding tax. In this case, the retail stations sell products on credit to the Fleet Cardholders, Retail stations deliver the goods to the Fleet Cardholders and issues its own sales invoice to evidence the sale. The Fleet cardholder accepts the product and signs a credit slip acknowledging the liability. At this point, the sale and purchase of goods between the Fleet Cardholder and the Retail dealer is consummated. Instead of collecting directly from the Fleet Cardholder, the Retail dealer goes to Shell and sells its receivables from the Fleet cardholders. Then Shell pays the Retail dealer and thereafter becomes the owner of the receivables. Thereafter Shell would turn to the Fleet Cardholders and collect payment. From the foregoing circumstances, there are basically two transactions. One is that which takes place between Shell and the Fleet Cardholder, while the other one is between Shell and the Retail Dealer. Between the Retail Dealer and the Fleet Cardholder is a sale and purchase of goods, while between the Retail Dealer and Shell, is a sale and purchase of receivables. In no instance did Shell sell any tangible personal property to the Fleet Cardholders. Since the sale of goods look place between the Retail Dealer and Fleet Cardholders, the payment collected and received by Shell from the Fleet Cardholder is not payment for the goods sold by the Retail Dealer to the Fleet Cardholders but rather for purchasing of receivables. Accordingly, there is no income payment attributable to Shell, and consequently, no basis for withholding tax. In stressing the rationale of the above-mentioned rule, this Office elucidated the matter in BIR Ruling No. DA288-03 dated September 1, 2003 , as follows: ". . . that the purchase of receivables by Caltex from the retail service stations and its subsequent payments by the third party company is not subject to the 1% creditable withholding tax under Section 2.57.2(M) of RevenueRegulationsNo.2-98. as amended." SUCH BEING THE CASE, this Office holds that the payments received by Shell from Fleet Cardholders as payment for trade receivables purchased from retail station are not subject to withholding tax. 2. Ideally, creditable withholding taxes are credited against income tax liability on the year that the corresponding sale transactions are reported in the income tax return. The issuance of the creditable withholding tax certificate presupposes that the party to whom it was issued is the party who made the sale and collected payment. (Sec. 2.583(A)(B), Revenue Regulations No. 2-98, as amended) In the instant case, the Fleet Cardholders withheld the 1% withholding tax on its payments to Shell, who actually collects the payment as a result of its purchase of receivables from the Retail Dealer. Since Shell collected the payment from the Fleet Cardholders, the creditable withholding tax certificates were likewise issued to it. Thus, Shell is nevertheless entitled to these creditable withholding tax certificates despite the fact that no sale is attributable to this creditable withholding tax. This is so because, the Retail Dealer sold without recourse to Shell its receivable from Fleet Cardholders gross of any withholding tax. In other words, Shell purchased the receivables from the Retail Dealer for a price equivalent to the face value of the invoice. It would have actually received the same amount in the invoice had not the Fleet Cardholders withheld the 1% creditable withholding tax and remitted the amount to the BIR. As the withholding and remittance of the tax is not home by any sale transaction, it is deemed as an advance tax payment that Shell can actually claim as a credit against its income tax liability. CTaIHE To fortify the above principle, this Office in BIR Rating No. 019-05 dated September 27, 2005 , ruled that "For as long as the above conditions are complied with, the 1% or 2% CWT, as the case may be, that the Big Brother will withhold on the face amount of the invoice shall be credited against the amount of income tax due of the SME/Supplier. (Sec. 204, Revenue Regulations No. 2) In addition, other withholding tax rates may be applicable depending on the nature of the business of SME/Supplier. The CWT shall be applied against the selling price of the goods/services appealing in the invoice receipt. Notwithstanding that the SME/Supplier has assigned the invoice and is no longer the payee of the invoice on maturity date, the SME/Supplier is still entitled to the CWT withheld by Big Brother as the amount of invoice that will be assigned will be net of the withholding tax. xxx xxx xxx" Accordingly, the taxes withheld are tax advances which can be credited against the tax liability of Shell. 3. With respect to your third query, it appears that when the Retail Dealer sells goods and services to Fleet Cardholders, it issues VAT sales invoices to evidence the sales. These invoices, together with the card transaction slips, become the basis for the sale of receivables by the Retail Dealers to Shell. On a monthly basis, Shell prepares and issues an electronic Statement of Account (SA) to the Fleet Cardholders summarizing the purchase transactions made to the Cardholders within a specified period. You are of the position that this electronic SA, together with a non-VAT Receipt, is a valid support for the claim of Fleet Cardholders for VAT input credit. We hereby deny your request for lack of factual and legal basis. Although the Fleet Cardholders may claim input tax credit on their purchase of goods subject to VAT, the transaction from which this claim should be based on is the actual sale of VAT able goods from the Retail Dealers to them and not their payments to Shell. As already discussed, the transaction between Shell and the Fleet Cardholders is not the sale of tangible goods or property but only reimbursement by the latter for the former's purchase of receivables from the Retail Dealers which is not subject to VAT. It is this transaction that is evidenced by the SA Shell issues to its Fleet Cardholders and not the actual sale of goods between the latter and the Retail Dealers, which is already substantiated by VAT invoices at the point of sale to the Fleet Cardholders. Thus, the electronic SA cannot serve as a basis for a claim for VAT input credit, considering that under the reimbursement arrangement, there is no apparent transaction between Shell and the Fleet Cardholders that would be reflected in the SA other than the ones which the latter had with the Retail Dealers. In addition, the issuance of the electronic SA by Shell which you requested to be the valid source of the claim for input VAT credit by Fleet Cardholders, if granted, would result in a double claim for VAT input credit by the latter. Furthermore, the electronic SA and non-VAT receipt issued by Shell to Fleet Cardholders cannot substantiate any Fleet Cardholders' claims for VAT input tax credit A13 of Revenue Memorandum Circular (RMC) No. 62-2005, effective October 18, 2005, expressly provides that a VAT-registered person shall issue (1) a VAT invoice for every sale, barter, or exchange of goods or properties; and (2) a VAT official receipt for every lease of goods or properties and for every sale, barter or exchange of services. Under the familiar rule of statutory construction of expressly unius est exclusio alterius, the mention of one thing implies the exclusion of another thing upon which it is to operate, everything else must necessarily and by implication be excluded from its operation and effect (Crawford, Statutory Construction, pp. 334-335). In this regard, that A13 of RMC 62-2005 clearly enumerates the invoicing/receipt requirement for VAT-registered persons and limits it to either a VAT invoice or official receipt, depending on the transaction, thus, an electronic SA and a non-VAT receipt cannot be considered as sufficient evidence for input VAT credit in accordance with this provision. aCSDIc Accordingly, the VAT invoices issued by Retail Dealers on the actual sale of goods to Fleet Cardholders forms the only basis for VAT input tax credit on these transactions and not the electronic SA with the non-VAT Receipt issued by Shell to the latter. Finally, BIR Ruling 019-05 has no application with respect to electronic SAs as valid bases for VAT input credit, considering that under the abovementioned Ruling, the electronic invoice/settlement receipt is issued by the SME/Supplier (seller/supplier) or the Trustee respectively, directly to the Big Brother (purchaser) entity. Under the given representation, Shell is neither the direct seller to the Fleet Cardholders nor a trustee of such seller, but merely purchases receivables owed to the Retail Dealers and issues electronic SAs to the Fleet Cardholders based on such transactions. 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 C. BUAG Commissioner of Internal Revenue