BIR Ruling [UN-262-95]

July 11, 1995 BIR RULING [UN-262-95] Department of Environment and Natural Resources Visayas Avenue, Diliman Quezon City Attention: Mr . Ricardo M . Umali Undersecretary for Planning, Policy and Project Management Gentlemen : This refers to your letter dated March 24, 1995 requesting clarification of BIR Ruling No. 123-94 dated August 4, 1994 specifically whether or not reimbursable or out-of-pocket expenses should be included in the tax base in the computation of taxes on consultancy services. It is represented that the contract cost of consultancy services in the DENR consists of three (3) categories, namely: Professional Fees, Reimbursable or Out-of-Pocket Expenses and Management Fees; that the professional fees include overhead costs and social charges while the reimbursable expenses consist of travel expenses, per diem, transportation, communication, cost of office supplies and cost of preparing/reproducing documents to be submitted as well as cost of other items deemed necessary for the project; that the management fee is the realized earnings of the consultancy firm; that presently you are imposing 5% on the total professional fees as creditable expanded withholding tax and 6% is imposed on the gross payment which is the sum of the professional fees, reimbursable expenses and management fees as creditable value-added tax; and that your consultants are raising the argument that the out of pocket or reimbursement expenses should not be included in the tax base since these are reimbursable items and do not accrue as income or profits to the consultants rather they should be treated as actual costs. In reply thereto, please be informed that reimbursement of actual expenses being a mere return of capital does not constitute income. Accordingly, said reimbursements are not subject to the withholding tax prescribed under Revenue Regulations No. 6-85 as amended otherwise known as the Expanded Withholding Tax Regulations nor to the creditable value-added tax under Revenue Regulations No. 10-93. Such being the case, reimbursable or out of pocket expenses should not be included in the tax base for purposes of computing the taxes on the consultancy services of consulting firms hired by the DENR for its foreign-assisted projects. (BIR Ruling No. 061-79 dated July 23, 1979) cdta Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)