Whether Withholding Tax Deductions under BIR Regulations 6-85 Exacted only on Professional/Talent Fees Paid to Individuals as Listed in Section C of BIR Form 1743-W and Whether they are to be Exacted on All Items of Expenditures (Such as Transportation, Board and Lodging, Supplies and Materials, Documentation, etc.) Which are Operating Costs of a Project Covered by a MCA

October 9, 1995 BIR RULING NO. 151-95 50 (b) 000-00 151-95 U.P. Public Administration Research and Extension Services Foundation, Inc . College of Public Administration Building University of the Philippines Diliman, Quezon City Attention: Dr . Amelia P . Varela Project Director Gentlemen : This refers to your letter dated March 22, 1995 stating that the University of the Philippines Public Administration Research and Extension Services Foundation, Inc. (UPPAF) is a non-stock, non-profit organization engaged in social science research and extension services and accredited by the Department of Science and Technology (DOST); that on December 7, 1994, the UPPAF through the College of Public Administration (CPA) entered into a Memorandum of Agreement (MOA) with the Department of Health (DOH) whereby the former agreed to undertake a policy review and program evaluation of the DOH generic drug policy and program; CPA, together with UPPAF, shall ensure the integrity and quality of the program to be undertaken pursuant to the MOA; that it will draw its project staff, consultants, and resource persons from a pool of competent, in-house and guest faculty and staff members of the College and the University of the Philippines System, practitioners from the DOH and other government as well as private agencies; that the program shall be financed by a non-reimbursable fee to be paid by DOH to the college through UPPAF in the amount of four Million Three Hundred Nine Thousand Two Hundred Forty Eight Pesos Only (P4,309,248.00) net of all applicable taxes; that the amount of P4,309,348.00 covers the professional fees for program design and implementation, board and lodging, transportation costs of the participants to and from the conference sites, and publication costs. This will also cover administrative costs for the use of the facilities for the College; that in connection therewith, UPPAF was informed by the Chief accountant of the DOH that a 10% expanded withholding tax imposed under Revenue Regulations No. 6-85, as amended would be deducted on personal services to be incurred by the project based on the budget items for personnel for the period covering the first four (4) months of the initial release of funds; that upon verification, UPPAF learned that Section C of BIR Form No. 1743-W lists professional/talent fees paid to individuals, as management and technical consultants would aptly fit persons who were employed by the project; that UPPAF pointed out to the DOH Chief Accountant that under the MOA, UPPAF is the payor and as such UPPAF is the one required under the said Revenue Regulations to deduct the said creditable withholding tax at the end of each month and remit the same to the BIR; that because it appeared then that the only way to have the initial funds released and get the project started is for UPPAF to agree to the 10% withholding tax deductions; that when UPPAF received the check, it was surprised to find out that 10% was deducted not only on personal service (management and technical consultants employed by the project) but also on all items of expenditures, including operational costs like land and air transportation and publication costs of the conference proceedings; that Section 4 of the MOA provides that the total amount paid by DOH to UPPAF shall be net of all applicable taxes; that under the same Section of the MOA it is likewise stated that: "the amount covers the professional fees for program design and implementation" (which is part of the paragraph which constitutes professional fees as management and technical consultants), "board and lodging, transportation costs of the participants to and from the conference sites, and publication costs" (which are operating costs and not professional fees); that the amount will also cover administrative cost of implementation; for the use of the facilities (office space and meeting rooms including air conditioning and upkeep), and equipment such as computers, xerox and fax machines, telephones, projectors, and other items like electricity and water; and that the said deductions will represent budgeted funds needed to conduct two regional conferences but which cannot be convened for lack of financial resources if the deductions will continue. prcd Based on the foregoing representations and documents submitted, you are now requesting in effect for a ruling on the following queries: "1) Are withholding tax deductions under BIR Regulations 6-85 exacted only on professional/talent fees paid to individuals as listed in Section C of BIR Form 1743-W? "2) Are they to be exacted on all items of expenditures (such as transportation, board and lodging, supplies and materials, documentation, etc.) which are operating costs of a project covered by a MCA? "3) Which agency is the payor authorized to deduct withholding tax?" In reply, please be informed that your above-quoted queries are answered as follows: 1. Under Section 1 (a) of Revenue Regulations No. 6-85, as amended, otherwise known as the Revised and Consolidated Expanded Withholding Tax Regulations implementing Section 50(b) of the Tax Code, as amended, there shall be withheld a creditable income tax of 10% on the gross professional, promotional and talent fees or any other form of remuneration paid to individuals enumerated thereunder. Hence, the 10% creditable withholding tax imposed under Section 1 (a) of Revenue Regulations No. 6-85, as amended, are to be withheld (exacted) only on the professional/talent fees paid to individual management and technical consultants hired by the UPPAF and CPA to undertake and implement the Program per MOA. 2. As stated in answer No. 1, the 10% creditable withholding tax prescribed under Section 1 (a) of Revenue Regulations NO. 6-85, as amended, shall be withheld on the gross professional, promotional and talent fees or any other form of remuneration paid to individuals enumerated under Section 1(a) of RR No. 6-85, as amended, or to individuals as listed in Section C of BIR Form 1743-W. Thus, the said 10% creditable withholding tax is imposed on income payments and therefore, could not be imposed on items of expenditure (such as transportation, board and lodging, supplies and materials, documentation, etc.) which are operating costs. 3. Under Section 3 of Revenue Regulations No. 6-85, as amended, the obligation of the payor to deduct and withhold under the said regulations arises at the time an income which is subject to withholding under Section 1 thereof is payable or paid. From the foregoing it is clear that the obligation to withhold rest upon the payor of the income. Hence, the University of the Philippines Public Administration Research and Extension Services Foundation, Inc. (UPPAF) being the payor of the management and technical consultants hired for the said project (subject of the MOA) is the agency under obligation to withhold the 10% creditable withholding tax on the amounts it will pay to the said management and technical consultants. On the other hand, as a DOST private accredited Foundation, the UPPAF shall be subject to tax on income, if any, derived from professional services and accordingly, to the creditable expanded withholding tax of 5% under Section 1 (b) of Revenue Regulations No. 6-85, as amended, on such professional fees based on the amount paid to the Foundation, but excluding reimbursements for board and lodging of participants in the review and study of the DOH Program, Publication costs and Administrative cost for the use of the UP facilities. cdpr In this case, DOH shall be the withholding agent of the 5% creditable expanded withholding tax imposed under Section 1 (b) of Revenue Regulations No. 6-85, as amended, on the professional fees, if any, paid to UPPAF, a juridical entity. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue