Alba Romeo and Co.

August 20, 2008 BIR RULING [DA-(VAT-022) 151-08] RR 16-05, as amended DA-147-06 Alba Romeo and Co. 7F Multinational Bancorporation Ctr. Ayala Avenue, Makati City Attention: Mr. Romeo C. Alba Gentlemen : This refers to your letter dated November 6, 2007 requesting confirmation of your opinion that the Premiums-in-trust for and in behalf of the insurance companies is not an income on the part of PMMSC and therefore should not be subject to income tax and consequently to withholding tax as well as the value added tax. DCTHaS It is represented that Philippine Machinery Management Services Corporation (PMMSC, for brevity) is a company incorporated on 22 February 1995 with the primary purpose of rendering management, administrative, consultancy, technical and other allied services to corporations, partnerships, associations, entities and persons engaged in the field of insurance, finance, manufacturing, engineering and related industries; that the stockholders of PMMSC, which are all non-life insurance companies (hereinafter referred to as the Ceding Companies) are likewise its clients; that these Ceding Companies entered into several treaties (Surplus Reinsurance Treaty, Second Surplus Reinsurance Treaty, Quota Share Reinsurance Treaty) with Munich Reinsurance, a reinsurance company, wherein, pursuant to a Reinsurance Agreement earlier entered into by the same parties, the Ceding Companies shall cede (hence the term "Ceding Companies") and/or reinsure to Munich Reinsurance under appropriate Treaties and in accordance with their Rules of Distribution, risks arising from primary insurance underwritten by each Ceding Company for their mutual benefit and to enable each Ceding Company to comply with their obligations to the insured; that to implement the Reinsurance Agreement and the treaties abovementioned, the Ceding Companies, Munich Reinsurance and PMMSC entered into a Treaties Administration Agreement whereby the Ceding Companies and Munich appointed PMMSC to provide the necessary administrative services, such as the computation of risks ceded, the preparation of statements, and the receiving, recording, holding in trust, and distributing funds from and to the Ceding Companies and Munich; that for the said services rendered, the Ceding Companies pay PMMSC management fees; that PMMSC collects premiums from the Ceding Companies and Munich and PMMSC issues Non-VAT official receipt for premiums received which are considered premiums-in-trust and this is recorded in the books of PMMSC as Payable-in-Trust, with the following accounting entries: cECaHA 1. Upon set-up of receivables Receivable-in-trust Premiums-in-trust 2. Allocation of premiums to reinsurance/ceding companies Premiums-in-trust Payable-in-trust 3. Upon collection Cash Receivable-in-trust 4. Upon remittance of premiums to reinsurance/ceding companies Payable-in-trust Cash The Ceding Companies and Munich entrust the premiums-in-trust to PMMSC, who in turn manages the same for the benefit of the former. No portion of these premiums-in-trust is diverted to the own funds of PMMSC. Any income arising therefrom by reason of the management of PMMSC redound to the benefit of the Ceding Companies and Munich. TaDSHC In reply, please be informed that in BIR Ruling No. DA-147-06 Sodexho administers the meal and food allowance benefits given by the employer (client company) to its employees through voucher system wherein the client company transfers to Sodexho the amount allotted for its employees' benefit with instruction on the amount to be allotted per employee. Sodexho issues vouchers which are delivered to the client and distributed to its employees. The employees thereafter use these vouchers to receive their benefit at an accredited establishment. The outlet send back used vouchers to Sodexho for reimbursement, and Sodexho reimburses the store outlet. Likewise in BIR Ruling No. DA-484-2004, citing the cases of McCann Erickson Philippines, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 5966, March 13, 2003 and Commissioner of Internal Revenue vs. Tour Specialists, Inc. G.R. No. 66416 dated March 21, 1990, this Office ruled 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, said amount shall not form part of its gross receipts subject to income tax. TaHDAS In the case of Commissioner of Internal Revenue vs. Tour Specialist Inc., G.R. No. 66416 dated March 21, 1990 citing the case of Commissioner of Internal Revenue vs. Manila Jockey Club, Inc. 108 Phil. 882, the Supreme Court declared that: "Gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit and it is not necessary that there must be a law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax Code". In the foregoing case, the Supreme Court affirmed the decision of the Court of Tax Appeals which excluded from the gross receipts of a local travel agency amounts received by the latter from foreign tourist agencies which form part of the package fee paid by the tourists but were intended or earmarked for hotel room accommodations and accordingly paid by the local travel agency to the hotels. In said case, the Court found that the hotel charges paid by the local travel agency were paid out of funds entrusted to it by the foreign tour correspondent agency. As such, the said receipts never belonged to the local travel agency, but only formed sums for payment to the hotels, without any portion thereof being diverted to its own fund. TSIDEa In the instant case, since the premiums-in-trust are merely entrusted by the Ceding Companies and Munich to PMMSC for the proper management by the latter of the funds without any portion thereof being diverted for its own use, and any income arising therefrom redounds to the sole benefit of the Ceding Companies and Munich, said premiums-in-trust shall not form part of its gross receipts subject to income tax and consequently to withholding tax. The premiums-in-trust are also not subject to VAT since the receipt of the said amount as such does not constitute payment for the performance of services pursuant to Sec. 4.108-1 Revenue Regulations 16-05, as amended, and therefore will not form part of the gross receipts of PMMSC subject to 12% VAT. However, the Ceding Companies shall be subject to VAT on the premium received. 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 void. ISCDEA Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service