Isla Lipana & Co.

February 17, 2009 BIR RULING [DA-(VAT-021) 092-09] DA519-05 Isla Lipana & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty. Alexander B. Cabrera Managing Partner Gentlemen : This refers to your letter dated January 30, 2009 stating that your client, Efficient Consumer Response Philippines (ECRP), is a joint trade and industry body working towards making the retail sector as a whole more responsive to consumer demand and promotes the removal of unnecessary costs from the supply chain; that it aims to create consumer value by meeting consumer expectations and eliminating non-added value activities; that ECRP's members include manufacturers, retailers and service providers; that the business relations among and between members of the ECRP are usually established through the medium of a supply agreement; that the supply agreement essentially brings about the obligation on the part of the seller to provide its products in consideration of the purchase price to be paid by the buyers; that invariably, the supply agreement has also become a tool for the promotion of the manufacturer's products and the retailers business; that aside from the usual obligation of the parties to supply and pay the appropriate consideration, it normally involves stipulations for the performance of other functions and activities on the part of the purchaser which aim to achieve a dual objective of promoting the manufacturer's product and increasing the retailer's (or distributor's) sales; that the said specific functions and/or activities have become part and parcel of the terms of the supply agreement; that the willingness of the parties to participate and stipulate on such trade terms impacts on the contract price and the perfection of the contract; that the performance of the parties' obligations under the contract also impacts on whether the supply contracts will be renewed or continued under the same trade terms; that in the case of ECRP members, to improve overall business and economic activity, the trade terms normally agreed upon by the manufacturers, distributors and retailers in their supply agreements include trade discounts given by manufacturers suppliers to retailers/distributors for undertaking promotional activities (including but not limited to: (a) provisions of prime space or preferred locations for product display and in-store advertisements; (b) product bundling; and (c) product sampling); that the above-mentioned discounts are characterized by the following: The grant thereof forms an integral part of the supply agreement considered by the parties as an essential element of the sales contract/supply agreement; Granted either as: o Unconditional discounts, i.e. , they are determined and granted at the time of sale and not dependent upon the happening of a future event and shown as a sales discount (deduction from selling price) in the invoice or directly excluded from the invoice price; or o Conditional discounts, i.e. , the grant and/or enjoyment of which is conditioned upon the subsequent happening of an event or the fulfillment of certain conditions. SIcTAC Based on the foregoing representations, you now request for confirmation of your opinion that 1. The unconditional trade discounts granted under the supply agreement are deductible from gross sales for value-added tax (VAT) purposes; and 2. The discounts, whether unconditional or conditional, granted under the supply agreement are not subject to creditable withholding tax (CWT). In reply thereto, please be informed as follows: 1. Section 106 (D) (2) of the Tax Code of 1997, as amended, provides that "(2) Sales Returns, Allowances and Sales Discounts . The value of goods or properties sold and subsequently returned or for which allowances were granted by a VAT-registered person may be deducted from the gross sales or receipts for the quarter in which a refund is made or a credit memorandum or refund is issued. Sales discount granted and indicated in the invoice at the time of sale and the grant of which does not depend upon the happening of a future event may be excluded from the gross sales within the same quarter it was given." Corollarily, Section 4.106-9 of Revenue Regulations No. 16-2005, as amended, provides that "SEC. 4.106-9. Allowable Deductions from Gross Selling Price . In computing the taxable base during the month or quarter, the following shall be allowed as deductions from gross selling price: (a) Discount's determined and granted at the time of sale, which are expressly indicated in the invoice, the amount thereof forming part of the gross sales duly recorded in the books of accounts. Sales discount indicated in the invoice at the time of sale, the grant of which is not dependent upon the happening of a future event, may be excluded from the gross sales within the same month/quarter it was given." HATICc In BIR VAT Ruling No. 068-91 dated July 5, 1991 , this Office ruled that ". . . in case of sales of goods, the 10% VAT is based on 'the gross selling price or gross value in money of the goods sold, bartered or exchanged'." However, if sold at a discount, sales discounts may be deducted from the gross selling price, provided such discounts are 'granted and indicated in the invoice at the time of sale'. (Sec. 100(d)(3), NIRC) This law is implemented by Section 6(c)(A) of Revenue Regulations No. 5-87, otherwise known as the VAT Revenue Regulations, as follows: "In computing the taxable base during a quarter, the following shall be allowed as deductions from gross selling price or gross receipts: (A) Discounts granted and determined at the time of sale which are expressly indicated in the invoice, and the amount thereof forms part of the gross sales duly recorded in the books of accounts. Discounts conditioned upon the subsequent happening of an event or fulfillment of certain conditions, such as prompt payment or attainment of sales goals, shall not be allowed as deductions." CaSAcH Similarly situated is the case in Commissioner of Internal Revenue vs. Central Luzon Drug Corporation, G.R. No. 159647 dated April 15, 2005 , where it was held that ". . . a functional discount is akin to a trade discount which is defined as a supplier's price discount given to a purchaser based on the latter's role in the former's distribution system. The subject trade terms, being functional (trade) discounts, may be deducted from the gross sales in the computation of VAT when they are unconditionally granted at the time of sale and not dependent upon the happening of a future event." Finally, in BIR Ruling No. DA519-05 dated December 22, 2005 , reiterating in BIR Ruling No. DA360-04 dated June 28, 2004 , this Office ruled that Accordingly, since the discounts, in the form of distribution margin, granted to the distributors are determined by TPPI at the time of sale, and that the discounts or distribution margin are expressly and separately indicated as sales discount or distribution margin in the sales invoices issued by TPPI to its distributors, and that the grant of sales discounts or distribution margin to the distributors of TPPI is not dependent upon the happening of a future event or upon the fulfillment of a certain condition, we hereby confirm your opinion that the discounts or distribution margin are deductible from TPPI's gross selling price or gross sales for purposes of determining TPPI's output VAT liability. IaSCTE 2. Anent the issue of discounts, whether unconditional or conditional, granted under the supply agreement, this Office ruled in BIR Ruling No. DA519-05 dated December 22, 2005 , as follows "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. In BIR Ruling No. DA360-04 dated June 28, 2004 , this Office had interpreted Section 2.57.2(O) of RR No. 2-98, as amended by Section 3 of RR No. 17-03, as follows: "Thus, the Commission and bonus paid by the Distributors to their Managers for meeting their group sales are subject to the expanded withholding tax at the rate of ten percent (10%) pursuant to Section 2.57.2(O) of Revenue Regulations No. 2-98, as amended by Section 3 of Revenue Regulations No. 17-2003, considering that title over the goods was not transferred from the Distributors to the Managers by virtue of the group sales. Moreover, where there is transfer of title over the goods from the seller to the agent/seller representative the ten percent (10%) creditable withholding tax does not apply, as in the straight sales transactions of Tupperware products by TPI (through TWP) to the Distributors and then to the Managers and Dealers." TADCSE Prior to the amendment of RR No. 2-98 by RR No. 17-03, this Office had the occasion to rule on the withholding tax consequences of sales discounts given to distributors. Thus, in BIR Ruling No. DA313-99 dated May 20, 1999 , it was ruled that 'Revenue Regulations No. 2-98 [formerly Revenue Regulations No. 6-85, as amended] implementing Section 57(B) of the Tax Code of 1997 [formerly Section 50(b) of the Tax Code, as amended], payments only to persons enumerated therein are subject to the expanded withholding tax. Since payments of purchases by these independent entrepreneurs to IGPC are made on cash basis or thru their major credit cards, hence a direct sale, and since these individuals are not employees, agents nor commercial brokers of IGPC, said individuals are therefore considered independent distributors. Consequently, payments by IGPC to its independent distributors in the form of "Additional Sales Discounts" and "Break Away Bonus" are not payments to commercial brokers. Hence, said payments are not subject to the expanded withholding tax because they are not among those specified in the above said Regulations.' Since a true and straight sale transactions exist between TPPI and the independent distributors, similar to any other sales transactions, the discounts and other similar considerations granted by TPPI to its distributors are not subject to withholding tax under Section 2.57.2(O) of RR No. 2-98, as amended by RR No. 17-2003 (BIR Ruling No. DA360-04 dated June 28, 2004). Accordingly, we hereby confirm that the distribution margin granted by TPPI to its independent distributors, being in the nature of sales discount, is not subject to the 10% creditable withholding tax." WHEREFORE, in view of the foregoing , this Office hereby confirm your opinion that 1. The unconditional trade discounts granted under the supply agreement are DEDUCTIBLE from gross sales for VAT purposes; and CITcSH 2. The discounts, whether unconditional or conditional, granted under the supply agreement are not subject to CWT. 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 Bureau of Internal Revenue