VAT Ruling No. 030-00

September 6, 2000 VAT RULING NO. 030-00 Sec. 105; R.R. 2-98 000-00 Arcadio R . Garcia & Associates Certified Public Accountants 3-1 Edificio Enriqueta corner D. Tuazon & Amoranto Sts. Quezon City Attention: Mr . Arcadio R . Garcia Partner Gentlemen : This refers to your letter dated November 17, 1999 requesting for a ruling on the tax liability of Mr. Gerardo D. Papa and Atty. Alan Sheker, Executor and Lawyer, respectively of the Estate of Antonio Tuason, Jr. In particular, you would like to seek official rulings on the following matter: "a. Are their fees subject to Value Added Tax? b. If so, when is the Value-Added Tax payable? c. Are their fees subject to withholding tax? d. If so, what rate should be applied and when is the Withholding Tax payable? e. If the fees are paid in installment over a period of two years: (1) How much yearly income should they report in their respective annual income tax returns? (2) How much Value Added Tax and/or Withholding Tax, if any, should they pay? (3) When are the Value Added Tax and Withholding Tax payable?" In reply, please be advised as follows: A. Value Added Tax The fees received by Mr. Gerardo D. Papa, who is the court-appointed Executor of the estate of Antonio Tuason, is not subject to VAT since it cannot be said that as such executor, he falls under the definition of persons liable to VAT, i.e., " (A)ny person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods . . . "(Section 105, Tax Code of 1997). Under Republic Act No. 8761, VAT on professionals, such as lawyers, is further deferred for one year from January 1, 2000 to December 31, 2000. Hence the professional fees paid by Atty. Alan Sheker within the said period shall not be subject to VAT. B. Withholding Tax The fees paid to Mr. Gerardo Papa, the court-appointed Executor, is not subject to withholding tax inasmuch as it is not among those payments subject to withholding tax as listed in Revenue Regulations No. 2-98. However, lawyer's fees payable to Atty. Alan Sheker is subject to the creditable withholding tax at the rate of 10% of the gross fees paid. The creditable withholding taxes deducted and withheld by the withholding agent shall be paid upon filing a return in duplicate with the authorized agent banks located within the Revenue District Office (RDO) having jurisdiction over the residence or principal place of business of the withholding agent and shall be filed and paid within ten (10) days after the end of each month except for taxes withheld for December which shall be filed on or before January 25 of the following year . C. If both executor's fees and lawyer's fees are payable in installment over a period of two years , the following would be the consequences on income tax and withholding tax: a. In the case of withholding tax on lawyer's fees, the obligation of the payor to deduct and withhold the tax arises at the time an income is paid or payable, whichever comes first . The term "payable" refers to the date the obligation becomes due, demandable or legally enforceable . (Section 2.57.4, RR 2-98). Hence, the withholding tax due should be paid as the fees become demandable or legally enforceable under the retainer's agreement or actually paid whichever comes first. b. The amount of executor's fees or lawyers fees to be declared in their respective income tax returns depends on the accounting method consistently employed in reporting income and expenses. If on accrual basis, the income should be reported upon the time that the same has accrued. On the other hand, if the method used is the cash basis accounting, the income shall be reported only in the period when actually received, except when constructively received, in which case the constructively received income shall be reported notwithstanding that the method used is the cash basis accounting. "Constructive receipt" occurs when the money consideration or its equivalent is placed at the control of the person who rendered the service without substantial restrictions by the payor. To constitute payment in such a case, the compensation must be credited or set apart for the payee without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, and must be made available to him so that it may be drawn upon at any time, and its payment brought within his control and disposition. TESDcA This ruling is being issued on the basis of the above representations. If upon investigation, it will be disclosed that the facts are different, then this ruling shall be deemed null and void. Very truly yours, (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue