Peoples Center for Science and Technology

August 24, 2009 BIR RULING [DA-(C-187) 474-09] R.A. 7686; RR 2-98, 17-03; BIR Ruling No. 12-83; 101-94; 061-97; DA 532-2007; DA 128-08 Peoples Center for Science and Technology 3rd Floor, SJPC Bldg., Brgy. Halang, Calamba City, Laguna Attention: Mr. Antonio G. Pedro Chairman & CEO Gentlemen : This refers to your letter dated July 21, 2009 requesting confirmation of your opinion that payments to be made to Peoples Center for Science and Technology (PCST) by Samsung Electro-Mechanics Philippines Corporation (SEMPHIL) under their Student In-Plant Training Agreement are not subject to the creditable withholding tax imposed under Revenue Regulations (Rev. Regs.) 2-98, as amended. TcEaDS It is represented that PCST is a corporation duly organized and existing under Philippine laws registered with the Securities and Exchange Commission (SEC) under SEC No. CS200256954 dated October 2, 2002; that it is a proprietary educational institution offering vocational/technical education under TESDA with TVET Program Registration No. NTR 08704A020325 dated September 20, 2008; that it is also an accredited Dual Training System Educational Institution under Republic Act (R.A.) 7686 otherwise known as "Dual Training System Act of 1994" under DTS Accreditation No. IVA-I2009-01 dated January 15, 2009; that it derives income from collection of tuition fees from students and reports the same as income subject to the special income tax rate of 10% of its net income provided under Sec. 27 of the 1997 Tax Code, as amended; that SEMPHIL, on the other hand, is likewise a corporation duly organized and existing under Philippine laws registered with the Philippine Export Zone Authority as an ecozone export enterprise with PEZA Registration No. 97-074 dated October 16, 1997. It is further represented that on June 9, 2009, SEMPHIL and PCST entered into a Student In-Plant Training Agreement for the conduct of a dual training system for the student trainees of PCST; that pursuant to the Agreement, SEMPHIL shall provide PCST's student trainees in-plant training for 624 to 1,920 hours and PCST shall provide in-school training for 836 hours based on a specially-designed training program; that for such training, SEMPHIL shall pay each trainee a training allowance equivalent to not less than 75% of the current minimum daily wage plus overtime pay, if any, as follows: 60% of the training allowance will be retained by PCST as partial payment of the trainees' tuition fees; and The balance of 40% of the training allowance will be paid directly as allowance by PCST to the students. The training allowance shall be periodically prepared and billed and by PCST and the payment shall be remitted by SEMPHIL to PCST for proper distribution to the trainees. It is finally represented that SEMPHIL is included in the top 20,000 taxpayers and, as such, is required under Rev. Regs. No. 2-98, as amended, to withhold 1% or 2% creditable withholding tax on income payments made to its suppliers of goods or services, respectively. However, it is your opinion that the amounts remitted by SEMPHIL to PCST pursuant to the Agreement are not payments by SEMPHIL for purchase of goods or services because they represent tuition fees and allowances for the student trainees. As such, you submit, that the payments are not subject to the creditable withholding tax under the Regulations. ASTcEa In reply, please be informed that under R.A. 7686, the trainees are not considered as employees of the business/industrial establishment as provided under Section 8 thereof, to wit: "SEC. 8. Status of Trainee. For the duration of the training under the System, the trainee is to be considered not an employee of the business/industrial establishment but rather a trainee of both the Accredited Dual Training System Educational Institution and the agricultural, industrial and business establishments: Provided, That, the union or the workers of the latter have been duly informed in advance of such agreement. Training allowances to be given by the accredited industrial and business establishments are mandated by said law as part of their obligations under the following Sections: "SEC. 10. Obligations of Accredited Agricultural, Industrial and Business Establishments. The agricultural, industrial and business establishments shall: xxx xxx xxx h) pay to the accredited educational institution/training center the daily allowance of the trainee; and xxx xxx xxx SEC. 12. Obligations of the Accredited Educational Institutions/Training Centers. The educational institutions/training centers that have entered into a memorandum of agreement with agricultural, industrial or business establishments to undertake training shall: xxx xxx xxx d) pay the trainee his daily allowance;" From the foregoing, and based on the Agreement between PCST and SEMPHIL, it is clear that the student trainees are not employees of SEMPHIL. Moreover, the payment of their training allowances, consisting of tuition fees and daily allowances, is made in compliance with the statutory obligations of SEMPHIL and PCST under R.A. 7686. In Sec. 2.57.2 (B) of Rev. Regs. 2-98, as amended, it is provided that: "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 (B) Professional fees, talent fees, etc. for services of taxable juridical persons On the gross professional, promotional and talents fees, or 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 P720,000.00 and Ten percent (10%), if otherwise." The items of income payments referred to in the above provision are enumerated in Sec. 2.57.2 (A), thus: DTcACa "(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 Ten percent (10%); (1) Those individually engaged in the practice of professions or callings: lawyers; certified public accountants; doctors of medicine; architects; civil, electrical, chemical, mechanical, structural, industrial, mining, sanitary, metallurgical and geodetic engineers; marine surveyors; doctors of veterinary science; dentist; professional appraisers; connoisseurs of tobacco; actuaries; and interior decorators; (2) Professional entertainers such as but not limited to actors and actresses, singers and emcees; (3) Professional athletes including basketball players, pelotaris and jockeys; (4) All directors involved in movies, stage, radio, television and musical productions; (5) Insurance agents and insurance adjusters; (6) Management and technical consultants; (7) Bookkeeping agents and agencies; (8) Other recipients of talent fees; (9) Fees of directors who are not employees of the company paying such fees, whose duties are confined to attendance at and participation in the meetings of the board of directors." This Office stated in BIR Ruling DA 532-2007 dated October 10, 2007, citing therein BIR Ruling 06-97 dated May 15, 1997, that only payments to persons enumerated under the withholding tax regulations are subject to withholding tax. In the said ruling, the BIR held that tuition fees collected by schools in rendering educational services to students are not subject to the creditable withholding tax since payments of such nature are not among those payments subject to withholding as specified in Rev. Regs. 2-98, as amended. Since the payments to be received by PCST from SEMPHIL are in part tuition fees of the student-trainees, and considering further that tuition fees are reported by PCST as taxable income subject to the special 10% tax rate, they cannot be considered as income payments subject to the creditable withholding tax imposed under Section 2.57.2 of Rev. Regs. 2-98, as amended. Neither can the payments representing daily allowances for the students be construed as compensation income subject to withholding tax for the reason that there is no employee-employer relationship existing between SEMPHIL and the student trainees. Under R.A. 7686, student-trainees are not considered as employees of SEMPHIL but as trainees of both the PCST and SEMPHIL. In view of the foregoing, this Office hereby confirms your opinion that payments to be made to PCST by SEMPHIL under their Student In-Plant Training Agreement are not subject to the creditable withholding tax imposed under Revenue Regulations (Rev. Regs.) 2-98, as amended. HAIaEc This ruling is being issued on 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