Gerodias Suchianco Estrella Law Firm

May 27, 2009 BIR RULING [DA-(C-076) 258-09] BIR Ruling No. DA-519-05 Gerodias Suchianco Estrella Law Firm Suite 2404 Discovery Center, 25 ADB Avenue Ortigas Center, Pasig City Attention: Atty. Raul G. Gerodias Gentlemen : This refers to your letter dated January 21, 2009 requesting on behalf of your client, Pioneer Hi-Bred Philippines, Inc. ("Pioneer" for brevity), for confirmation of your opinion that the sales rebates Pioneer grants to its distributors as incentives are not subject to creditable withholding tax pursuant to Revenue Regulations (RR) No. 2-98, as amended. DAaIEc As represented, Pioneer is a corporation duly organized and existing under the laws of the Republic of the Philippines. Its business involves the selling of hybrid corn seeds for agricultural use. To market its hybrid corn seeds ("Products"), Pioneer utilizes a network of distributors it refers to as its dealers. Pioneer delivers the Products to its dealers in accordance with market demand and the dealers' orders. The orders are usually made by the dealers per crop cycle. Upon delivery of the Products by Pioneer, the dealers then confirm with Pioneer their acceptance of such delivered Products. Thereafter, Pioneer sends to each of the dealers an invoice covering the Products sold which states the terms of payment. Upon payment, Pioneer issues an official receipt to the dealer. As an incentive to the dealers who promptly pay and for purchasing a specified volume of the Products, Pioneer gives its dealers cash rebates. Pioneer directly disburses the rebates to the dealer per semester (January to June and July to December) after some internal processing time. If a particular dealer has outstanding payables to Pioneer, the rebates will be applied to the outstanding amount and any balance will be released to the dealer. In reply, please be informed that Section 2.57.2 (O) of RR No. 02-98, as amended by Section 3 of RR No. 17-03, provides as follows: "Sec. 2.57. 2 Income payment 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 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%)" ATCEIc In BIR Ruling No. DA-519-05 dated December 22, 2005, a domestic corporation engaged in the manufacture and sale of Lipovitan products entered into distribution agreements with various independent distributors for the distribution of the aforesaid products in the Philippines. The terms of said distribution agreements provide that: 1) the products shall be purchased by the distributors from the corporation at mutually agreed trade prices, less the distribution margin of thirteen percent (13%); 2) the margin allowed for the distributor shall cover credit terms and financial discounts that are normally extended in the trade; 3) the distributors are independent contractors and are not considered agents or legal representatives of the corporation; and 4) the title and risk to the products shall pass to the distributors upon delivery to, and acceptance by, said distributors of the said products. This Office ruled in the above cited case that " . . . 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." Moreover, since the dealers are not employees, agents nor commercial brokers of Pioneer, they are, therefore, considered independent distributors. Thus, payments by Pioneer to its dealers in the form of cash rebates are not payments to commercial brokers subject to the expanded withholding tax. In view of the foregoing, we hereby confirm your opinion that since there is a transfer of ownership of the Products to the dealers, especially since the rebates are only given after prompt payment by the dealers and the purchase of the required volume, Pioneer is not obliged to withhold income taxes on these 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 as null and void. HTAEIS Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner