Pelaez Gregorio Gregorio & Lim

November 27, 2009 BIR RULING [DA-(C-283) 705-09] DA484-04; DA353-97 Pelaez Gregorio Gregorio & Lim 6F Padilla Building, F. Ortigas Jr. Road Ortigas Center, 1605 Pasig City Metro Manila Attention: Atty. Vicente G. Gregorio Gentlemen : This refers to your letter dated October 23, 2009 stating that your client, LOWE, INC. (LOWE), is an advertising agency duly registered with the Securities and Exchange Commission (SEC); that LOWE enters into contracts with media and production suppliers (Suppliers) for and in behalf of its clients; that the Suppliers in consideration of the media and production packages and services, bills the client through LOWE and in turn LOWE bills its clients of what the suppliers bill it and adds a fee or the applicable commission rate for its services; that LOWE sends the bills of the Suppliers with its fees to the clients; that the clients pay LOWE the total amount billed and withholds the creditable withholding tax (CWT) for the full amount of LOWE's billings the amount the Suppliers bills through LOWE and the commissions it earns and remit whatever they withhold to the Bureau of Internal Revenue (BIR); that when LOWE receives these payments, LOWE pays the Suppliers for the amount they have billed through LOWE and retains the commissions it earns; that LOWE in turn withholds the CWT from what it pays the Suppliers and remit whatever it withholds to the BIR; that it is to be noted that LOWE uses the CWT withheld by its clients covering the total billings it sends to the Clients (the amount the Suppliers bills LOWE and the commissions it earns) when LOWE files its income tax returns for its commissions; and that this is the reason why the CWT (if grossed up), claimed by LOWE as creditable tax to its income tax return is bigger than its income. Based on the foregoing representations, you now request for an opinion that although LOWE claimed higher CWT as reflected in its income tax returns, LOWE cannot be faulted and it cannot be subjected to assessment or further imposition of income taxes since the CWT withheld by its clients are based on the total billings of LOWE, i.e., the amount the suppliers bill LOWE and the commissions it earns, as the advertising costs and expenses paid to media and production suppliers cannot and should not form part of LOWE's taxable gross receipts. In reply thereto, please be informed that it is a principle in taxation that income, in the broad sense, means all wealth, which flows into the taxpayer other than mere return of capital (Section 36, Revenue Regulations No. 2). Income for tax purposes is the amount of money coming to a person or corporation within a specified time, whether as payment for services, interest, or profits from investment ( Fisher vs. Trinidad, 43 Phil. 973). The advertising costs and expenses paid to media and production suppliers received by LOWE from its clients are not a flow of wealth from clients to LOWE inasmuch as these are payables held in trust by LOWE for eventual remittance to the suppliers without any mark-up or additional charges. There being no income payment, there is, therefore, no income to speak of that will result in the imposition of income tax or creditable withholding tax. ISTDAH In stressing the rationale of the above-mentioned principle, this Office had already occasioned to rule on the matter, when it said in BIR Ruling No. DA-484-04 dated September 10, 2004 citing BIR Ruling DA-353-97 dated October 30, 1997, as follows: "Considering that Telicphil had control over the payment to suppliers or contractors for Telicphil and NDTN costs, the withholding of taxes by Telicphil, in lieu of the NDTN co-owners, on income payments made to suppliers or contractors of NDTN costs and the remittance thereof to the BIR using the tax identification number of Telicphil is deemed substantial compliance with the withholding tax requirements insofar as the correct amount of taxes were withheld and remitted to the government. Hence, said remittance may be credited to the account of the NDTN co-owners, as the actual payors." Thus, it is vitally important to stress that while the CWT being claimed by LOWE to the BIR may appear higher as against the net taxable income of LOWE, the government is not at all prejudiced as the CWT on media and production costs as billed by the suppliers are also withheld by LOWE and remitted to the BIR. Consequently, the revenues reported by LOWE in its tax returns are deemed correct as there is no under declaration of income made to the BIR. SUCH BEING THE CASE, this Office holds LOWE cannot be faulted and be subjected to the imposition of income taxes when it claimed higher CWT as reflected in its income tax returns, which CWT withheld by its clients is based on the total billings of LOWE, i.e., the amount the suppliers bill LOWE and the commissions it earns. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service