Punongbayan & Araullo

October 8, 2009 BIR RULING [DA-(C-229) 590-09] 27 (A); DA-147-2006; DA-556-2007; DA-238-2005; DA-(VAT-022) 151-08; 038-02 Punongbayan & Araullo 19th Floor, Tower One, The Enterprise Center 6766 Ayala Avenue, Makati City Attention: Atty. Raymund S. Gallardo Tax Partner Gentlemen : This refers to your letter dated November 3, 2008, requesting on behalf of your client, Sodexho Pass, Inc. ("Sodexho" for brevity), for confirmation of your opinion that clients of Sodexho which are duly notified Top Ten Thousand (10,000) 1 private corporations should base its computation of the expanded withholding tax on the service fees paid, excluding the face value of the vouchers received by Sodexho. HEAcDC It is represented that Sodexho is a corporation organized and existing under the laws of the Philippines with the following primary purposes: To set-up and fully manage services, improve and add value to the administration of benefits, privilege and/or subsidies given or granted by private or public organizations to their respective employees, business partners or beneficiaries including but not limited to the issuance and processing of service vouchers, cards and other innovative processes and generally to perform any and all acts connected with the business aforementioned or arising therefrom and/or incidental thereto, as may be allowed by existing laws, rules and regulations; that Sodexho administers the meal and food allowance benefits given by the employer (client company) to its employees through vouchers system, known also as "Gift Certificate", which involves the following procedures, and we quote: "1. Client company transfers to Sodexho the amount allotted for its employees' specific benefit ( e.g. , meal, rice subsidy) with instruction on the amount to be allotted per employee; 2. Sodexho issues vouchers (for each employee with the value allotted for the respective employees' benefit) and delivers the same to client company; 3. Client company distributes these vouchers to its employees; 4. Employees use these vouchers to receive their benefit at an accredited establishment ( e.g. , Restaurant/food outlets) of their choice; 5. Outlets send back used vouchers to Sodexho for reimbursement; 6. Sodexho reimburses the store outlet." It is further represented that Sodexho issues vouchers with specific value printed in each voucher to client companies. In the issuance of such vouchers, Sodexho issues non-VAT official receipts to the client company and recognizes in its books a liability account upon receipt of the payment for the face value of the vouchers. On the other hand, participating establishments which accepted the vouchers as payment for meal or purchase of food items issue non-VAT official receipts to Sodexho upon payment of the vouchers by the latter. IcSEAH Sodexho charges service fees to its client companies and issues VAT invoices and/or official receipts to these companies upon receipt of the service fees. It is your opinion that since the monies received by Sodexho from its clients represent advance payment to third parties and, therefore, do not redound to the benefit of Sodexho, the said amounts shall not form part of its gross receipts subject to income tax imposed under Section 27 (A) of the Tax Code of 1997, and consequently to withholding tax. On the other hand, service fees which form part of the gross receipts of Sodexho is subject to income tax and withholding tax. On the issue of expanded withholding tax, it is your opinion that the basis for computing the same should be the service fees and not the whole amount including the value of the voucher since such value does not constitute income on the part of Sodexho. In reply, please be informed that service fees paid to Sodexho by its clients constitutes gross income subject to income tax and consequently, to expanded withholding tax, pursuant to Section 27 (A) of the Tax Code of 1997, which provides: "Sec. 27. Rates of Income Tax on Domestic Corporations. "(A) In General. Except as otherwise provided in this Code, an income tax of thirty-five (35%) is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under this Title as a corporation, organized in, or existing under the laws of the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). xxx xxx xxx." As regards the amounts received by Sodexho from its client companies for the face value of the vouchers and for which Sodexho shall have to issue separate non-VAT official receipts, it has been ruled by this Office that the same do not fall within the purview of gross income. This is because the money received by Sodexho from its client companies is not compensation for services rendered by Sodexho but a liability/deposit to be reimbursed by Sodexho to the participating establishments (BIR Ruling No. DA-566-2007, dated October 25, 2007, citing BIR Ruling No. DA-147-2006, dated March 17, 2006, which in turn cited BIR Ruling Nos. DA-238-2005, dated June 1, 2005; VAT Ruling No. 038-02 dated June 21, 2002; and DA-(VAT-022) 151-08 dated August 20, 2008). AEDISC Based on the foregoing principle, the computation of the expanded withholding tax due on the income payments of Sodexho's client corporation is based on the service fees alone, and should exclude the amounts received representing the respective values of the vouchers, since such amounts do not form part of Sodexho's gross income. The principle enunciated in BIR Ruling No. DA-566-07 also applies to clients of Sodexho that are classified as Top Ten Thousand (10,000) taxpayers for expanded withholding tax purposes, pursuant to Section 2.57.2 (M) of Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 17-03. Stated differently, clients of Sodexho that are classified as Top Ten Thousand (10,000) taxpayers should only base its computation of the expanded withholding tax due, on the service fees they pay to Sodexho. 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 Footnotes 1. Rev. Regs. No. 14-08 further amends Sec. 2.57.2 (M) of Rev. Regs. No. 2-98, increasing the coverage of withholding tax agents from top 10,000 to top 20,000 private corporations.