VAT Ruling No. 050-02

September 12, 2002 VAT RULING NO. 050-02 R.R. 2-98, as amended by R.R. Nos. 6-2001 & 12-2001 073-89 Nomura Securities Philippines, Inc. 18/F, Tower 2 The Enterprise Center 6766 Ayala Avenue corner Paseo de Roxas Makati City 1200 Attention: Ms. Anna Menchie Fabros Manager Administration and Ms. Amalia Reyes Manager Administration Gentlemen : This refers to your letters dated September 3, 2001 and January 3, 2002 requesting for legal opinion with respect to the basis of the withholding tax on your income payments to your suppliers, contractors and lessor. It is represented that Nomura Securities Philippines, Inc. (Nomura) is a stockbroker and a former VAT-registered entity; that with the passage of Republic Act No. 8424, the tax regime of stockbrokers was shifted from Value Added Tax to Gross Receipts Tax (GRT) until December 31, 2002; that prior to its shift to GRT, the withholding of taxes was not a problem on Nomura's part because its expenses or income payment is the same as that of its suppliers/contractor's revenue/income; that with its shift to GRT, such lease payment with the VAT thereon passed on by the lessor, leads to disparity between its expenses and that of its VAT registered suppliers/contractors recorded revenue; that an issue has been raised by its lessor to the effect that the withholding tax on its payment should be based on the amount net of value added tax (VAT); that you were given the impression by the BIR officers that the tax base for purposes of creditable withholding tax is on the total expenses booked notwithstanding that the revenue recorded by the other party is the amount net of the 10% of VAT. Pursuant to Section 4.114 of Revenue Regulations No. 2-98, as last amended by Rev. Regs. Nos. 6-2001 and 12-2001, in general, value-added tax due on sales of goods and services are not subject to withholding since the tax is not determinable at the time of sale. In connection therewith, Section 2 of Revenue Regulations No. 6-2001 amending Sec. 2.57.2 of Rev. Regs. No. 2-98, as amended, provides for the withholding of creditable income tax from income payments made to persons residing in the Philippines at the rates specified for each class of payee, as enumerated and as applicable, to wit: "(A) Professional fees, talent fees, etc. for services rendered by individuals . On the gross professional, promotional and talent fees or any other form or remuneration for the services of the individuals "xxx xxx xxx "(6) Management and technical consultants Ten percent (10%) "(7) Bookkeeping agents and agencies Ten percent (10%) "xxx xxx xxx "The amounts subject to withholding under this paragraph shall include not only fees, but also per diems, allowances and any other form of income payments. . . ; "(B) Professional fees, talent fees, etc., for services rendered by individuals . On the gross professional, promotional and talent fees or any other form of remuneration enumerated in the preceding subparagraph for the services of taxable juridical persons Ten percent (10%) "(C) Rentals . On the gross rental for the continued use or possession of real property used in business which the payor or obligor has not taken or is not taking title, or in which he has no equity Five percent (5%) "(D) . . . "(E) Income payments to certain contractors . on gross payments to the following contractors, whether individual or corporate Two percent (2%) "xxx xxx xxx "(4) Other contractors "xxx xxx xxx "(g) Messengerial, janitorial, private detective and/or security agencies, credit and/or collection agencies and other business agencies; "(h) Advertising agencies, exclusive of gross payments to media; "xxx xxx xxx Income payment necessarily pertains to the income paid to and received by the recipient. For purpose of creditable withholding tax on such income payments, it shall be the gross income embracing the cost of materials, overhead costs, labor, etc. but exclusive of the VAT, of the payee. (BIR Ruling No. 073-89). VAT as a tax cannot be subjected to another tax. Such being the case, the VAT when included in the gross income payment of the payor-buyer of the goods or services must be excluded in computing the creditable withholding tax. Accordingly, for purposes of creditable withholding tax on your income payment to your supplier, contractor and lessor, the tax base shall be the gross income payment net of value-added tax. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group