TKC Heavy Industries Corporation

July 30, 2008 BIR RULING [DA-(C-018) 091-08] RR 17-2003; BIR Ruling No. DA-071-05 TKC Heavy Industries Corporation 17 Bulacao Pardo Cebu City Attention: Mr. Leon B. Tio President Gentlemen : This refers to your letter dated March 31, 2008, referred to this Office by way of 1st Indorsement, requesting for a ruling that as indentor, TKC is not subject to the 6% withholding tax on the purchase of the Municipality of Sibalom, Province of Antique ("Municipality" for brevity) of dump trucks from Jinan Seven Star Machinery Co., Ltd., Jinan City, Shandong Province ("Jinan" for brevity). As represented, sometime in 2006, the Municipality, imported two (2) units of Brand New 6-Wheeler Dyongfeng Dumptruck Model EQ3061 per Proforma Invoice No. MECL-2006-076 dated September 27, 2006 valued at US$63,300.00 from Jinan wherein Main Empire Company Ltd. ("Main Empire" for brevity), a Singapore based company was appointed by Jinan to act as their receiving agent. In turn, Main Empire got the services of TKC Heavy Industries Corporation ("TKC" for brevity) as their counterpart in the Philippines and act as their indentor. All papers relative to said transactions were all in the name of the Municipality, including that of the import entry issued by the Bureau of Customs. As per request of the municipal mayor, the Department of Finance issued an exemption from payment of duties and taxes for this particular importation. The units are now in the possession of the Municipality. Main Empire is authorizing TKC to make a follow up, collect and receive payment for and in their behalf. They were informed by the Municipality that the check is now ready for pick-up. However, they wanted TKC to issue an OR for this transaction and that the 6% withholding tax that will be deducted from said payment will be issued and credited to TKC's name. aTIEcA In reply, please be informed that prior to Revenue Regulations (RR) 17-2003, the gross receipts of a broker transacting with the government were subject to the 5% withholding tax under Section 2.57.2. (G) of RR 2-98. Thereafter, RR 2-98 was amended by RR 6-2001 which raised the 5% rate to 10%. RR 2-98 was further amended by RR 17-2003 which added a new provision on commissions of independent and/or exclusive sales representatives, and marketing agents of companies and imposed a 10% withholding tax thereon. Section 2.57.2. (G) is more general covering commissions of all brokers whereas the new provision, Section 2.57.2 (O) is more particular and specifically applies to TKC. Section 2.57.2 of RR 2-98, as amended by RR 17-2003 covering income payments made starting June 1, 2003 reads as follows: "Sec. 2.57.2. Income payments subject to creditable withholding tax and rates prescribed thereon. Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines: xxx xxx xxx (G) Income payments to certain brokers and agents. On gross commissions or service fees of customs, insurance, stock, real estate, immigration and commercial brokers and fees of agents of professional entertainers. Ten percent (10%) [then 5%] xxx xxx xxx (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%) CHDAEc xxx xxx xxx (N) Income payments made by the government to its local/resident supplier of goods and local/resident supplier of services other than those covered by other rates of withholding tax. Income payments, except any casual or single purchase of P10,000 and below, which are made by a government office, national or local, including barangays, or their attached agencies or bodies, and government-owned or controlled corporations, on their purchases of goods and purchases of services from local/resident suppliers Two percent (2%) [then 1%] xxx xxx xxx" Applying the above provision, the income payments made by the Municipality to TKC where the titles to the goods sold were not transferred from Jinan, the seller to TKC, the agent/sales representative is subject to withholding tax at the rate of 10% under Section 2.57.2 (O) of RR 2-8 as amended by RR 17-2003. Moreover, the same income payments shall no longer be subject to the 2% withholding tax under Section 2.57.2 (N) of the same regulations because of the phrase "other than those covered by other rates of withholding tax". This means that income payments already subjected to other rates of withholding tax need not be subjected further to the withholding tax under Section 2.57.2 (N) of RR 2-98, as amended. However, items billed by TKC which constitute reimbursable expenses such as documentation and processing fees that were invoiced in the name of the Municipality shall not form part of its gross receipts for purposes of computing the withholding tax. As a matter of principle, advance payments for expenses of brokers i.e., arrastre, wharfage, form and waybills, magna scale, documentation fee, trucking and handling charges are not considered as income payments. The brokers merely collect what they have advanced in behalf of their clients and hence, they do not derive any income from collecting such advances. On the other hand, reimbursable expenses that were incurred for TKC's benefit in order to facilitate the clearing of goods through customs and invoiced in TKC's name, shall form part of its gross receipts subject to withholding tax (BIR Ruling No. DA-426-03 dated November 25, 2003). 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. IHcSCA Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service