DND Cannot Withhold Tax from the Sales Commission of Agent Which is a Non-Resident Foreign Corp.

February 5, 1998 BIR RULING NO. 012-98 Sec 50 (b)-000-00-012-98 Department of National Defense Governmental Arsenal Camp General Aguinaldo Luna Limay, Bataan Attention: Director Niceto F . Festin Gentlemen : This refers to your letter dated September 19, 1997 stating that the Republic of the Philippines through the Department of National Defense Government Arsenal (DND-GA) has an existing Purchase Order (P.O. No. 267-96) with Olin Brass with office address at 427 N. Shamrock St., East Alton, IL 62024, U.S.A.; that the terms and conditions specified under the aforesaid P.O., among others, are as follows: 1. Olin Brass, through its duly authorized representative, Asia Defense and Armaments Corporation, with office address at 2304-B Philippine Stock Exchange Center, East Tower, Exchange Road, Pasig City shall supply and/or make available 50 tons BRASS STRIPS and 7 tons COMMERCIAL BRONZE; 2. The items shall be delivered C & F from any USA Port as the port of origin (accordingly packed in the usual standard export packaging) and to arrive at the Port of Manila as the port of destination within 90 calendar days after the opening of a foreign Letter of Credit; prLL 3. Payment shall be made thru an irrevocable Letter of Credit at Sight in the total amount of US Dollars Two Hundred Fourteen Thousand Four Hundred Ten (US$214,410) in favor of OLIN BRASS, 427 N. Shamrock St., East Alton, IL 62024, U.S.A. that in the Memorandum from your Assistant Secretary for Installations and Logistics, Department of National Defense, your Office was directed to withhold the taxable percentage of the commission earned by or paid to the duly authorized representative agent of Olin Brass; that you are not, however, aware of any BIR or government policy on the withholding of tax on agent's commission; that you were informed that the Commissioner of Internal Revenue gave a verbal advice to the DND Legal Officer who made consultation with the Commissioner to coordinate with the nearest BIR Regional Office regarding this matter; that, as per inquiry made with the BIR Region III Regional Director, there is no existing policy on withholding tax on agent's commission; that inasmuch as it is a pre-requisite by the Department to submit proof of tax withheld from said commission, you were constrained not to open the Letter of Credit for the aforementioned P.O. 267-96; and that you urgently need the items in the manufacturing operations that any delay in the importation will greatly affect your commitments. Hence, this request. In reply, please be informed that pursuant to Section 50(b) of the Tax Code, as amended, the Secretary of Finance may upon recommendation of the Commissioner of Internal Revenue require the withholding of tax on the items of income payable to persons (natural or juridical) residing in the Philippines by payor-corporations/persons as provided for by law, at the rate of not less than 2 1/2% but not more than 35% thereof which shall be credited against the income tax liability of the taxpayer for the taxable year. But since payment by the Department of National Defense (DND) is made directly to OLIN BRASS through an irrevocable Letter of Credit at Sight opened for that purpose, the latter being the one who pays DND's agent commissions without communicating to the DND the amount thus paid, this Office is of the opinion as it hereby holds that DND cannot withhold tax from the said agent's commission. LexLib It must be noted that the Bureau of Internal Revenue has no existing regulations designating a non-resident foreign corporation, like OLIN BRASS, as a withholding agent on behalf of the Government of the Philippines for income payments made to an agent residing in the Philippines. DND cannot be required to withhold tax from the said agent's commissions since the payment of the shipment is settled or effected through a Letter of Credit without any portion thereof specifically designated to be paid as agent's commissions, and that the Purchase Order likewise did not mention that the agent has to be paid in commissions nor does the DND have any direct means of ascertaining the tax base. This will not preclude, however, DND's agent from filing its income tax return and paying its income tax due for the commission income it derived from the said transaction. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue