4% Contractor's Tax Based on the 5% Service Fee of an Independent Contractor

February 2, 1988 BIR RULING NO. 020-88 170 000-00 020-88 Gentlemen : This refers to your letter dated November 4, 1986 requesting confirmation of opinion to the effect that your client, Mondial Orient Ltd. (Phil. Branch) cannot be considered a commercial broker for purposes of the 7% broker's tax but an independent contractor subject to the 4% contractor's tax based on the 5% service fee under then Section 170 of the Tax Code. cdt It is represented that Mondial Orient Ltd. is a Philippine Branch of Mondial Orient Limited, a corporation organized and existing under the laws of HongKong; that it was registered with Securities and Exchange Commission and with the Board of Investments on October 11, 1976 and August 20, 1976, respectively; that your client is authorized to render purchasing and export services of textile products to its head office and affiliates; that pursuant to a Service Agreement between Mondial International & Co. and Mondial Orient Ltd. such services include market exploration, assistance to buyers of the former and other parties as may be designated, supervising and checking the execution by the suppliers of orders placed by buyers and monitoring the administrative handling of such orders; that Mondial International reimburses your client for any expenses directly or indirectly incurred in performing such services which included salaries, travelling expenses, costs resulting from depreciation of capitals assets, rent and maintenance of office, taxes (exclusively of taxes based on gross or net income) and any other administrative expenses; and that for and in consideration of the services performed, your client receives a fixed service fee of 5% of the total direct and indirect expenses incurred in performing such service which are reimbursed by Mondial International. In reply, please be informed that on the basis of the foregoing representation, your opinion is hereby confirmed. A cursory reading of the Service Agreement between your client and Mondial International & Co., clearly shows that the activities of the former are essentially for the performance of purchasing and export services of merchandise. Nowhere in the said Service Agreement is there a Clause authorizing your client to bring together a proposed buyer and seller or to bring about sales of merchandise. Moreover, your client's fees for services rendered is fixed at 5% and not dependent on the consummation of any sale between the buyer and seller. These features negate the imposition of the 7% broker's tax prescribed by Section 174 (formerly Section 208) on the service fee which your client received from Mondial International & Co. In other words, your client cannot be considered a commercial broker who is defined as: ". . . one who is engaged, for others, on a commission, negotiating contracts relative to property with the custody of which he has no concern; the negotiator between other parties, never acting in his own name, but in the name of those who employed him; he is strictly a middleman and for some purposes the agent of both parties. . . ." (Behn-Meyer & Co. Ltd. vs. Nolting & Garcia, 35 Phil. 274, citing 19 Cyc. 1986; Henderson vs. The State, 50 Ind. 235; Black' Law Dictionary) As regards your contention that the 4% contractor's tax due from your client should be based on the 5% service fee exclusive of the expenses reimbursed by Mondial International & Co., this Office also finds the same to be meritorious. It is noted that Mondial Orient Limited and Mondial International & Co. are owned and controlled by the same stockholders and under the arrangement between said corporations, all expenses incurred by the former were generally advanced and/or reimbursed by the latter. Hence, all direct and indirect expenses incurred by your client in performing its services and which are reimbursed by Mondial International & Co. cannot be considered part of your client's taxable receipts. This conclusion finds support in the case of Progressive Development Corporation vs. Commissioner of Internal Revenue, CTA Case No. 1549 dated August 5, 1970 which ruled that if two corporations are practically owned and controlled by the same party, the expenses incurred by the sister corporation which were generally advanced and/or reimbursed by the principal and made for the account of the latter cannot be considered as part of the taxable receipts of the former. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner