Taxability of Payments Made to Consulting Firms Hired by the DENR for Its Foreign-Assisted Projects

August 4, 1994 BIR RULING NO. 123-94 50 (b) 000-00 123-94 Department of Environment and Natural Resources Visayas Avenue, Diliman Quezon City Attention: Mr . Manuel E . Gonzales, Jr . Gentlemen : This refers to your undated letter requesting a clarification on whether the consulting firms hired by that agency for its foreign-assisted projects are subject to withholding tax based on payments made for services rendered by such firms. cdta It appears that your foreign-assisted projects known as ENR-SECAL is funded by the World Bank with the Government providing the counterpart fund; that the project has an allocation of U.S. $15 million for technical assistance; that the payment scheme for the consulting services is through direct payment by the Bank, 100% chargeable against the loan proceeds; that upon presentation of the bills by the consulting firm, you prepare an application for withdrawal but that, being on a direct payment scheme by the Bank, you cannot withhold the corresponding taxes therefrom; that an arrangement is therefore made between the consulting firm and your office whereby the former shall pay the tax directly to you and that you will remit said tax to this Bureau. Based on the foregoing, you asked the following questions: "1. Are consultancy firms whether local or foreign, subject to withholding tax? "2. If so, what is the correct applicable rate? "3. Is our temporary arrangement in the payment of taxes by the consulting firm okay with the BIR?" In reply, please be informed as follows: Questions 1 & 2 These consultancy firms are subject to Philippine corporate income taxes. Therefore, pursuant to Section 1(b) of Revenue Regulations No. 6-85 implementing Section 50(b), in relation to Sections 24(a) and 25(a) of the Tax Code as amended, receipts of consultancy service, e.g., professional fees, talent fees, etc., by the consulting firms above-described which entered into consultancy service with you are subject to the creditable expanded withholding tax to 5% based on the gross remunerations paid for their service. This is true even if the consulting firm is local or foreign (engaged in trade or business in the Philippines). Moreover, said consultancy firms are subject to the additional withholding tax for creditable value-added tax based on 6% of gross payments, exclusive of 10% VAT, pursuant to Section 5, Revenue Regulations No. 10-93, which implemented Republic Act No. 7649 effective July 1, 1993. The fact that under the payment scheme agreed by the parties, the World Bank upon your authorization directly releases the income payment to the consulting firms does not at all affect the applicability of the adverted withholding tax regulations because under said arrangement, you, as the contractee in the project, are still the income payor and therefore, the designated withholding agent. World Bank, which provided the loan and released the periodic payments to the contractor did so as your agent. Question No. 3 The temporary arrangement in the prior payment of taxes by the consulting firms through you, before the loan proceeds are released by the World Bank to the consulting firms upon your application for withdrawal is entirely acceptable and, therefore, as in all cases involving similar arrangement, is hereby approved. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue