VAT Ruling No. 038-02

June 21, 2002 VAT RULING NO. 038-02 Secs. 105 and 108 000-00 Joaquin Cunanan & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Ms. Tomasa H. Lipana Managing Partner, Tax Services Gentlemen : This refers to your letters dated 17 August 2001, 14 March 2002 and 19 June 2002 requesting on behalf of your client, Sodexho Pass International (Sodexho),for a confirmation of the following opinions: 1. That the management and marketing fees paid to Sodexho by its clients and participating establishments, respectively, form part of Sodexho's gross receipts subject to ten percent (10%) value-added tax (VAT);and 2. That the amount received by Sodexho from its clients for the face value of the vouchers does not form part of its gross receipts subject to 10% VAT. It is represented that Sodexho is a foreign corporation organized and existing under the laws of France; that it is a service company engaged in operating innovative systems (systems vouchers) to manage employee benefits given by private and public companies and social benefits provided by local authorities; and that in the Philippines, Sodexho proposes to introduce administration of meal/food allowance benefits given by Philippine employers ("client companies") to their employees through a voucher system, which involves the following procedures and we quote: "1. Client company transfers to Sodexho the amount allotted for its employees' specific benefit (e.g.,meal, rice subsidy) with instructions on the amount to be allotted per employee; 2. Sodexho issues vouchers (for each employee with the value allotted for the respective employee's benefit) and delivers the same to client company; 3. Client company distributes these vouchers to its employees; 4. Employees use these vouchers to receive their benefit at an accredited establishment (e.g.,restaurant/food outlets) of their choice; 5. Outlets send back used vouchers to Sodexho for reimbursement; 6. Sodexho reimburses the store outlet." It is represented that Sodexho will not claim any input tax on its payment of the face value of the used vouchers presented by participating establishments. Such amount is intended to compensate the member establishments for the meals/food items purchased by the voucher holders. Accordingly, Sodexho will issue non-VAT official receipts to the client companies and will recognize in its books a liability upon receipt of the payment for the face value of the vouchers. On the other hand, the participating establishments which accepted the vouchers as payment for meal or purchase of food items will issue non-VAT official receipts to Sodexho upon payment of the vouchers by Sodexho. Consequently, no input VAT will be shifted to and claimed by Sodexho. Moreover, inasmuch as the employees will use the vouchers as cash in their purchase of meals/food items, the participating establishments will issue VAT invoices and/or VAT official receipts to the voucher holders similar to their other customers. It is further represented that Sodexho will charge management fee to its client company for the administration of the employee benefits and that the fee will be equivalent to a certain percentage of the amount of vouchers issued to the client company. In addition, Sodexho will also charge marketing fee to the participating establishments for the added turnover generated by the voucher system and for the verification of the voucher's validity and the processing, as well as monitoring, of a secure and reliable global voucher system. The marketing fee will be equivalent to a certain percentage of the amount of sales made through Sodexho's vouchers. Accordingly, Sodexho will issue VAT invoices and/or VAT official receipts to its client companies and to the participating establishments, upon receipt of the management fees and marketing fees, respectively. In reply, we confirm your opinion that the management and marketing fees paid to Sodexho by its clients (company/employers) and participating establishments, respectively, are payments for services rendered in the Philippines which constitute gross receipts subject to 10% VAT. Sections 105 and 108 of the Tax Code of 1997 provide as follows: "SEC. 105. Persons liable. Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 and 108 of this Code. xxx xxx xxx The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business. "SEC. 108. Value-added tax on sale of services and use or lease of property. (A) Rate and base of tax. There shall be levied, assessed, and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. The phrase `sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration ..." The term "gross receipts" is defined under said Section 108 as follows: "The term `gross receipts' means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax." Based on the foregoing, both the management fees paid by client companies to Sodexho for the administration of the employee benefits, and the marketing fees charged by Sodexho to the participating establishments for the added turnover generated by the voucher system and for the verification of the voucher's validity and the processing, as well as monitoring, of the voucher system, fall within the above definition of gross receipts, hence, subject to 10% VAT. Pursuant to Section 113 of the Tax Code, Sodexho shall issue VAT official receipts to the client companies and participating establishments upon collection of the management and marketing fees, respectively. It has been ruled by this Office that the fees paid by dealers to Pilipinas Shell Petroleum Corporation (PSPC) for helping generate higher sale and for assuming the risk of collecting from the Fleet Cardholders and the attendant administrative burden, and the charges collected by PSPC from the Fleet Cardholders which represent various fees such as annual fees, joining fees, late payment penalties and others, shall be considered as payments for services rendered in the Philippines. Thus, the same shall be subject to the 10% VAT prescribed under Section 108 of the Tax Code, as amended. (BIR Ruling No. 209-99, dated December 28, 1999) With regard to the amount received by Sodexho from the client companies for the face value of the vouchers and for which Sodexho shall have to issue separate non-VAT official receipts, we confirm your opinion that the same does not fall within the purview of the term "gross receipts" as defined in our VAT law, hence, not subject to 10% VAT. This is because the money received by Sodexho from its client companies is not compensation for services rendered by Sodexho but a liability/deposit for reimbursement to the participating establishments. The Supreme Court had occasion to affirm the decision of the Court of Tax Appeals which excluded from the gross receipts of a local travel agency amounts received by the latter from foreign tourist agencies which form part of the package fee paid by the tourists but were intended or earmarked for hotel room accommodations and accordingly paid by the local agency to the hotels. The Court found that the hotel charges paid by the local travel agency were taken out of funds entrusted to it by the foreign tour correspondent agency. As such, the said receipts never belonged to the local travel agency; but only formed sums for payment to the hotels, without any portion thereof being diverted to its own funds. The Court thereby declared: "Gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit; and it is not necessary that there must be a law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax Code." ( Commissioner of Internal Revenue vs. Tours Specialists, Inc., G.R. No. 66416 dated March 21, 1990 citing the case of Commissioner of Internal Revenue vs. Manila Jockey Club, Inc., 108 Phil. 882) Accordingly, since the monies received by Sodexho from its clients for the face value of the voucher are to be used by Sodexho to compensate the participating establishments for sales made through the use of the former's vouchers and, therefore, do not redound to the benefit of Sodexho, said amount shall not form part of its gross receipts subject to 10% VAT. 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.) REN G. BAEZ Commissioner of Internal Revenue