Aranas Consunji & Barleta Law Office

May 27, 2009 BIR RULING [DA-(C-077) 259-09] Sec. 105 of the NIRC; Sec. 36 of RR No. 2; DA-109-07; DA-289-07; DA-438-06; DA-489-05; DA-176-04; Aranas Consunji & Barleta Law Office Unit 106 G/F Le Metropole Condominium Tordesillas Corner Dela Costa Streets, Salcedo Village, Makati City Attention: Atty. Ma. Louella M. Aranas This refers to your letter dated 3 October 2008, on behalf of your client, Epson Precisions Philippines, Inc. (EPPI), requesting for confirmation of your opinion that: AEDHST The reimbursements of costs made by the EPSON GROUP to SEC under the Cost Allocation Agreement including payments for the use of the internet gateway facility and the costs attributable to the purchase of software from the following companies, namely: Microsoft Operations Pte. Ltd., Symantec Japan, Inc., and SSA Global Japan KK shall not be subject to VAT, income and withholding taxes in the Philippines. It is represented that EPPI is a corporation duly organized and existing under the laws of the Philippines, with business address at Special Export Processing Lot 1, Block 3, Phase 5, Ampere St., Light Industry & Science Park 1, Bo. Diezmo, Cabuyao, Laguna, and registered as an Ecozone Export Enterprise under PEZA Certificate of Registration No. 95-18; that EPPI, together with the following entities (hereinafter collectively referred to as the EPSON GROUP): Philippines Epson Optical, Inc., a corporation organized and existing under the laws of the Philippines, with business address at Special Export Processing Zone, Gateway Business Park, Javalera, General Trias, Cavite, and registered as an Ecozone Export Enterprise under PEZA Certificate of Registration No. 05-011; Epson Imaging Devices (Phils.), Inc., a corporation organized and existing under the laws of the Philippines, with business address at Integrated Microelectronics, Inc., 2nd Floor Bldg. I, North Science Avenue, Special Economic Processing Zone, Laguna Technopark, Bian, Laguna, and registered as an Ecozone Export Enterprise under PEZA Certificate of Registration No. 05-07; Epson Software Engineering (Phils.), Inc., a corporation organized and existing under the laws of the Philippines, with business address at 8th Floor Skyrise I.T. Building Asiatown I.T. Park Cebu City, and registered as an Ecozone I.T. Enterprise under PEZA Certificate of Registration No. 06-09-IT, entered into a Cost Allocation Agreement with SEC, a foreign corporation organized and existing under the laws of Japan. It is further represented that under the Cost Allocation Agreement, the EPSON GROUP shall pay SEC its allocated costs with respect to the internet gateway maintained by SEC in accordance with the number of users and extent of usage by the respective EPSON GROUP, and the corresponding expenses relating to the upkeep of the gateway, including, among others, payments for software purchased by SEC in maintaining this internet gateway; that in addition to the foregoing, EPPI, together with the rest of the EPSON GROUP were made parties to various licensing agreements entered in their behalf by SEC with the following software companies: Microsoft Operations Pte. Ltd., Symantec Japan, Inc., and SSA Global Japan KK; that under the said agreements, the EPSON GROUP, as affiliates of SEC, are granted a limited right to use and implement the software purchased from the Licensors; that in consideration for the use and implementation of the software, the EPSON GROUP shall reimburse SEC with their share on the cost of the fees paid by SEC relating to the various software purchased. In reply please be informed that the cost allocation paid by the EPSON GROUP to SEC pursuant to the Cost Allocation Agreement and the reimbursement of costs arising from the various software purchased by SEC on behalf of the EPSON GROUP shall be subject to the following taxes in the Philippines: THSaEC Income Tax Well settled is the rule that reimbursement of cost shall not be regarded as income, but as a return of capital. The foregoing is supported by BIR Ruling DA-289-07 dated May 9, 2007, where we held that: "In reply, please be informed that under Section 36 of Revenue Regulations No. 2, income, in the broad sense, means all wealth which flows into the taxpayer other than as a mere return of capital. It has been a settled rule that reimbursement of cost is merely a return of capital and does not constitute income, and consequently, is not the proper subject of withholding taxes (BIR Ruling No. DA-489-05 dated December 6, 2005; BIR Ruling No. DA-176-04 dated April 6, 2004; BIR Ruling No. DA-438-03 dated December 4, 2003 citing BIR Ruling Nos. DA-158-97 dated April 14, 1997, UN-262-95 dated July 11, 1995 and 245-95 dated July 5, 1995)." Considering that all payments made by the EPSON GROUP to SEC, represents allocated costs to the EPSON GROUP according to its usage of the internet gateway, and which costs are representative of the amounts actually spent by SEC with no element of mark up or profit, then such payments are in the form of actual reimbursements to SEC and as such is not subject to income or any withholding tax. This also applies to payments made by the EPSON GROUP to SEC for their proportionate share on the fees paid by SEC to the various software companies which fees are allocated to them on the basis of a cost sharing scheme. Considering that there is no element of mark up or profit on payments made to SEC, then such fees are not income to SEC and not subject to income or withholding tax. TAESDH Value Added Tax Additionally, the said reimbursement is not subject to VAT. This is pursuant to BIR Ruling No. DA-109-07 dated February 19, 2007, to wit: "In view of all the foregoing, this Office is of the considered opinion that receipt, of mere reimbursement of cost with no mark-up or profit element of utility charges paid in behalf and for the account of the stall owners/tenants and not being charges for sale of goods or services, shall not form part of NEPSCC's gross income subject to the EWT and the 12% VAT." Applying the foregoing in the instant case, the reimbursement of costs as contained in the Cost Allocation Agreement, including any software expenses incurred by SEC by virtue of the internet gateway facility, shall not be subject to 12% VAT. In addition, the payments made by the EPSON GROUP to SEC for their allocated share in the various software purchased by the latter company being mere reimbursement of costs shall not be subject the 12% VAT. 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 as represented 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