BIR Ruling [DA-733-06]

December 19, 2006 BIR RULING [DA-733-06] RR 2-98; 30-2003; DA-265-04 Quiason Makalintal Barot Torres & Ibarra 21st Floor Robinsons-Equitable Tower 4 ADB ave. cor. P. Poveda St. Ortigas Center, Pasig City Attention: Attys. Wilfrido E. Sanchez & Benedict R. Tugonon Gentlemen : This refers to your letter dated September 5, 2006 requesting for and in behalf of your client, CENTER FOR LEADERSHIP AND CHANGE, INC. ("CLCI"), for a ruling on the withholding tax consequences of the payments made by the clients of CLCI from its sale of the FranklinCovey products and services in the Philippines. It is represented that CLCI is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with office address at 4/F Ateneo Professional Schools, 130 H.V. dela Costa Street, Salcedo Village, Makati City. CLCI is the authorized distributor of FranklinCovey products and services in the Philippines. FranklinCovey Co., a leading global professional services firm offering learning and performance solutions, is a non-resident foreign corporation organized and existing under and by virtue of the laws of the State of Utah, USA. Pursuant to the Exclusive International License and Distribution Agreement between CLCI and FranklinCovey Co., CLCI was granted the right to use, promote and market several FranklinCovey products and services in the Philippines including among others The Seven Habits Training Program and the First Things First Training Program, which are video assisted programs developed by FranklinCovey for use in providing leadership, management and effectiveness training to interested persons. CLCI generates its revenues primarily from its sale of the abovementioned FranklinCovey products and services in the Philippines (i.e. training/seminar programs) and secondarily from sale of the printed and video materials which are all prepared in the US. None of the CLCI employees or representatives act as management and technical consultants to any of its clients in the Philippines since the function of CLCI is merely to market the products and services of FranklinCovey and implement the training/seminar modules designed and supplied by FranklinCovey. From the foregoing, you are requesting confirmation of your opinion as follows: 1. The payments made to CLCI by its client is not subject to the 10% or 15% withholding tax imposed on payments made to "Management and Technical Consultants" under Section 2.57.2(B) of the Revenue Regulations No. 2-98, as amended, among others, by Revenue Regulation 30-2003 (the "Withholding Tax Regulation"); 2. The payments made to CLCI by payors who are not classified as top ten (10) thousand corporations by the Bureau of Internal Revenue ("BIR") under Revenue Regulations No. 17-2003 are not subject to withholding tax; and 3. The payments made by clients of CLCI which are classified as top ten (10) thousand corporations by the BIR is subject only to the withholding tax rate of 1% in case of sale of goods and 2% in case of sale of services. In reply please be informed that the provisions of Section 2.57.2(B) of Revenue Regulations (Rev. Regs.) No. 2-98, as amended among others by Revenue Regulation 30-2003, provides: "Sec. 2.57.2. Income payments subject to creditable withholding tax and rates prescribed thereon . . . . (A) Professional fees, talent fees, etc., for services rendered by individuals. On the gross professional, promotional and talent fees or any other form of remuneration for the services of the following individuals Fifteen Percent (15%), if the gross income for the current year exceeds P720,000; and Ten Percent (10%), if otherwise: xxx xxx xxx (6) Management and technical consultants; xxx xxx xxx (B) Professional fees, talent fees, etc., for services of taxable juridical persons. On the gross professional, promotional and talent fees, of any other form of remuneration enumerated in the preceding subparagraph for the services of taxable juridical persons Fifteen percent (15%), if the gross income for the current year exceeds P720,000; and Ten percent (10%), if otherwise;" In the case of Anscor Container Corp. vs. CIR, CA-G.R. SP No. 22912 , cited in BIR Ruling No. DA-265-04, the Court of Appeals defined "management and technical consultants" as entities engaged to supervise, direct and control the management and operation of other companies. As represented and based on the engagement contracts and invoices submitted, the functions and business of CLCI is not that of "management and technical consultants" since it is not engaged to supervise, direct and control the management and operation of its clients. CLCI is merely engaged in the sale and distribution of the products and services of FranklinCovey, including the implementation of training/seminar modules designed and supplied by FranklinCovey. Accordingly, this Office hereby confirms that CLCI is not a management and technical consultant and consequently the fees paid to CLCI for its sale and distribution of the products and services of FranklinCovey, including the implementation of training/seminar modules designed and supplied by FranklinCovey are not subject to the 10% or 15% withholding tax rate imposed under the provisions of Section 2.57.2(B) of the Rev. Regs. No. 2-98, as amended, among others, by Rev. Regs. No. 30-2003. Moreover, this Office is of the position that with the exception of payments of fees to CLCI by top ten thousand private corporations duly notified by the Bureau of Internal Revenue pursuant to the provisions of Rev. Regs. No. 17-2003, the payments to CLCI are not subject to withholding tax. There are no specific provisions in the current withholding tax regulations expressly subjecting seminar and training fees, including the sale of printed and video materials, to withholding tax on income. Lastly, this Office is of the position that with respect to payments made to CLCI by payors who are classified and notified by the BIR as among the top ten thousand corporations, the payments for the purchase of goods and services are subject only to the withholding tax rates of 1% and 2%, respectively, in accordance with the provisions of Rev. Regs. No. 2-98, as amended by Rev. Regs. No. 17-2003, which provides: "(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. aSEHDA Supplier of goods One percent (1%) Supplier of services Two percent (2%)" 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service