BIR Ruling No. 023-09

November 26, 2009 BIR RULING NO. 023-09 RR 2-98; 000-00 Benedicta Du-Baladad and Associates 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty. Benedicta Du-Baladad Partner Gentlemen : This refers to your letter dated January 29, 2009 requesting on behalf of your client, Credit Card Association of the Philippines, Inc. (CCAP), for confirmation of your opinion that payments made by credit card companies to merchants and service establishments (M/SE) for the purchase of receivables are not subject to 1% or 2% withholding tax imposed on payments for goods or services under Section 2.57.2 (M) of Revenue Regulations 2-98, but rather to the 1% of 1/2 under Section 2.57.2 (L) of the same revenue regulations; and that the amount upon which the withholding tax rate shall be based is the gross amount paid to the M/SE representing the purchases made by the cardholders, as indicated in the charge slip, including VAT, if any, that may have been included in the goods/services purchased. It is represented that CCAP is a non-stock, non-profit organization of corporations or entities engaged in the business of issuing credit card in the Philippines. It was incorporated with the principal purpose of establishing, maintaining, and perpetuating mutual confidence and closer cooperation among its members as regards the management and protection of the credit card industry with the idea of bringing about mutual improvement, greater security and certainty in business customs and usages. Incidental to its purpose is to ensure unanimous and uniform application and implementation of rules and procedures among its members. In this regard, CCAP now requests a clarification as to the appropriate withholding tax rate and the proper tax base for purposes of computing the withholding tax on the payments made by credit card companies to M/SE. In particular, you would like to request for a confirmation of your opinion as follows: 1. Payments made by credit card companies to M/SE for the purchase of receivables are not subject to 1% or 2% withholding tax under Section 2.57.2 (M) of Revenue Regulations No. 2-98 but rather to 1% of the 1/2 of the gross amount paid under Section 2.57.2 (L) of the said revenue regulations; and aIEDAC 2. For purposes of computing the withholding tax of 1% of 1/2 of the gross amount paid pursuant to Section 2.57.2 (L) of RR 2-98, the withholding tax rate shall be based on the gross amount indicated in the charge slip including VAT, if any, that may be incorporated in the said amount. We reply, as follows: 1. Section 2.57.2 (M) of Revenue Regulations (RR) No. 2-98, as amended, requires top 20,000 corporations to withhold 1% and 2% on income payments made to supplier of goods and supplier of services, respectively. The 1% and 2% tax rate on income payments will only apply in cases of income payments made by top 20,000 corporations to supplier of goods or services which are not subject to any specific withholding tax rates provided in the said revenue regulations (Revenue Memorandum Order Nos. 47-04 dated July 15, 2004; Revenue Memorandum Circular Nos. 45-07 and 44-07 both dated July 6, 2007) . On the other hand, Section 2.57.2 (L) of RR No. 2-98 provides that a withholding tax of 1% shall be withheld on the 1/2 of the gross amounts paid by any credit card company in the Philippines to any business entity, whether a natural or juridical person, representing the sales of goods or services made by the aforesaid business entity to cardholders. In view of the specific provision in Section 2.57.2 (L) of RR No. 2-98, as amended, payments made by credit card companies to M/SE for the purchase of receivables are not subject to 1% or 2% withholding tax under Section 2.57.2 (M) of RR No. 2-98 but rather to 1% of the 1/2 of the gross amount paid. Moreover, the term "goods" contemplated by RR No. 2-98 pertains to tangible personal property. It does not include intangible personal property as well as real property (Sec. 2.57.2 (M) (1) of RR 2-98 as amended by RR 17-2003) . As extensively discussed and ruled by this Office in BIR Ruling No. 151-90 dated August 16, 1990, payments made by a credit card company to M/SE pertain to the sale and purchase of receivables of M/SE from cardholders. In BIR Ruling No. 151-90, this Office illustrated the nature of the business of a credit card business, to wit: "A credit card company enters into an agreement with the merchants/establishments selling goods or services; that under said agreement the establishment agrees to honor the credit card issued by the credit card company (company) by providing goods or services on credit to the holder thereof subject to certain credit limitations; that upon receiving the goods or services the cardholder signs the corresponding invoice which the establishment (refers to Merchants) later on and within a period of 15 to 30 days assigns and sends to the company (card company) for payment which is made within 48 hours. Subsequently, the cardholder pays for the price of the goods or services appearing on the invoice while the credit company pays the establishment at an agreed discount. The discount given by the establishment and the fee paid by the cardholder represent the company's compensation or profit. TCaEIc Documents submitted indicate that each card transaction must be covered by a charge sales slip accomplished properly as directed in the Merchant's (establishment) Card Acceptance Guide (MCAG); that the original copy of the establishment's sales or commercial invoices or receipts shall be given directly to the cardholder at the time of purchase/charge together with the quadruplicate copy of the company's charge sales slip; that the establishment represents and warrants to the credit card company that all charge slips submitted to and accepted by the latter; (a) represents a bonafide sale of merchandise and/or service in the ordinary course of business for the total sales price; (b) involves no advance of cash and no transaction other than the regular sale of goods/services for which establishment is primarily engaged; (c) will not be defective, illegal or otherwise as may impair enforce ability of collection thereof from the named cardholder: (1) pertains to sale of merchandise and/or service; that establishment assumes full responsibility on any such merchandise and/or service returned and/or questioned by the cardholder; that the establishment hereby agrees to indemnify and hold the company free and harmless from any claim relating to any charge sales slip paid to the company as may be made by way of defense, dispute, offset, counter claim or affirmative action of cardholder; that the establishment (Merchants) shall sell to the company (card company) the original and duplicate copy of all charge sales slip validly incurred by genuine charge availments at a discount rate (inside parenthesis referring to Merchants and credit card companies supplied). . . . the credit card company generates revenues principally from discount granted by the establishment and incidentally from fees paid by the cardholder; and that the credit card company finances the cardholder for the latter's purchases on credit, since said purchases are paid by the company prior to billing the cardholder. Accordingly, these activities fall within the purview of finance companies, or similar to it, as defined in Section 11 of P.D. No. 1739 . . ." Thus, it has been settled in several BIR Rulings that a card business is engaged in financing activities with respect to its discounting of receivables. (BIR Ruling No. 151-90 dated August 16, 1990 and BIR Ruling UN-170-95 dated April 19, 1995) In case of purchases using a credit card, the M/SE allows the customer ( i.e., cardholder) to make the purchase on credit. The said receivables of the M/SE from the customer or cardholder are then assigned by the former to the credit card company at a discount for early payment or settlement of the transaction. What is being sold to and purchased by the credit companies are the receivables from purchaser-cardholder. Hence, the payments made by the credit card companies, which are termed "settlement of accounts", are for those receivables transferred or assigned to them by the merchant. Clearly, such payments are neither payments for the purchase of services nor goods. HCTAEc Since a receivable is an intangible personal property, the same does not fall within the realm of "goods" contemplated by the said revenue regulations to be subjected to withholding tax under Section 2.57.2 (M) of RR No. 2-98. As earlier adverted, payments made by credit card companies for these receivables are subject to the tax rate provided under the specific provision in Section 2.57.2 (L) of RR No. 2-98, that is, 1% of 1/2 of the gross amount paid to the M/SE. 2. As to the determination of the proper tax base for purposes of computing the withholding tax, this Office, likewise, affirms your opinion that for purposes of computing the withholding tax of 1% of 1/2 of the gross amount paid pursuant to Section 2.57.2 (L) of RR No. 2-98, the withholding tax rate shall be based on the gross amount indicated in the charge slip including VAT, if any, that may be incorporated in the said amount. Section 2.57.2 (L) of RR No. 2-98 explicitly provides that the 1/2 of 1% tax rate shall be applied on the "gross amounts paid" by the credit card companies, to wit: "(L) Certain income payments made by credit card companies. On one half (1/2) of the gross amounts paid by any credit card company in the Philippines to any business entity, whether a natural or juridical person, representing the sales of goods/services made by the aforesaid business entity to cardholders One percent (1%)." (Emphasis supplied.) Basically, there are two transactions involved in the card business operations. The first is the purchase on credit of goods and services by the cardholder from business establishment M/SE; and the second is the purchase of the receivables of the M/SE by the credit card company. Payment made by a credit card company to M/SE in the second transaction, as extensively discussed earlier, is not a payment for goods and services but rather, payment for debt or obligation since the transaction is a sale and purchase of receivables. In VAT Ruling No. 016-97 dated February 27, 1997, which has been cited also in later BIR Ruling No. 019-05 dated September 21, 2005, while sales of goods and services are subject to VAT under Sections 106 and 108 of the Tax Code, this Office has categorically ruled that sales of accounts receivables to banks and/or financial institutions in the nature of financing alternative are not subject to VAT, to wit: "In reply, please be informed that sale of account receivables to banks and/or financial institutions in the nature of financing arrangement is a mere collection alternative. Since such sale on credit was already subjected to VAT, the financing scheme intended to convert the account receivables of the seller to cash is no longer subject to another round of VAT under Section 100 of the Tax Code." DTIaHE It has been settled that credit card companies like banks and/or financial institution fall within the purview of finance companies, or similar to it (BIR Ruling No. 151-90 dated August 16, 1990 and BIR Ruling No. DA-411-07 dated July 26, 2006) . The sales of receivables by M/SE to credit card companies being in the nature or a financing arrangement and a collection alternative to the M/SE, the payments made by credit card companies to M/SE for the sale and purchase of receivables from cardholders are not subject to VAT. Clearly, the gross amounts paid by credit card companies to M/SE are understood to be without any VAT component, although the first transaction from which the receivables arose may have a VAT component in it. Stated otherwise, unlike in the case of goods and services where the withholding tax is based on the amount net of VAT, the payments of credit card companies to M/SE which are only settlements or payments of the cardholder's debt (and not a purchase of goods and services) should be based on the total amount paid without any deduction of VAT. Accordingly, this Office confirms your opinion that the 1/2 of 1% withholding tax imposed on payments made by the credit card companies to M/SE should be based on the gross amount indicated in the charge slip without deducting the VAT component, if any, that may have been incorporated in the said amount which arose from the sales of goods or services. WHEREFORE, this Office holds that payments made by credit card companies to M/SE for the purchase of receivables are not subject to 1% or 2% withholding tax imposed on payments for goods or services under Section 2.57.2 (M) of RR No. 2-98, but rather to the 1% of 1/2 under Section 2.57.2 (L); and that the amount upon which the withholding tax rate shall be based is the gross amount paid to the M/SE representing the purchases made by the cardholders, as indicated in the charge slip, including VAT, if any, that may have been included in the goods/services purchased. 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.) JOEL L. TAN-TORRES Senior Deputy Commissioner (Officer-in-Charge)