VAT Ruling No. 060-97

September 30, 1997 VAT RULING NO. 060-97 R.A. 8241; 000; 060-97 Ms. Josette G. Lasala Filmarke Enterprise, Inc. Suite 807 PSBank Towers Sen. G.J. Puyat Avenue Makati City M a d a m : This refers to your letter dated July 2, 1997 requesting clarification on certain tax issues raised by your client, CONSOLIDATED TRADING CORPORATION (CTC), regarding the imposition of VAT and other related issues. cdta It is represented that your client, Consolidated Trading Corporation, is a domestic corporation engaged in the importation and trading of books, computers and Compact Discs Read Only Memory (CD-ROM); that it sells its products on cash and installment basis through its dealers who are SEC-registered corporations; that the company dealers maintain their own sales agents to whom sales commissions are paid regularly; and that sales agents consists of individuals and SEC-registered corporations. In connection therewith, you posed the following queries: "1. Are books and computers subject to the value-added tax (VAT)? "2. Is the CD-ROM, which is an electronic copy of the encyclopedia, subject to VAT? "3. Under what condition does an employer-employee relationship exists? "4. Are commissions paid to corporate or individual agents subject to VAT in the absence of an employer-employee relationship? "5. If an employer-employee relationship exists, are commissions paid to agents subject to VAT? "6. Will the taxes withheld on commissions and remitted to the BIR by the company (i.e., withheld by CTC) be used as tax credits by the Company Dealers to be offset against the monthly remittance of taxes withheld on the sales agent's commission? "7. Will the company (i.e., CTC) itemize the names of the dealers or that of the sales agents in the submission of the Annual Information Return of Income Tax Withheld on compensation, Expanded and Final Withholding Taxes (BIR FORM 1743-IR)? "8. Will the interest income on installment sales subject to VAT?" In reply, please be informed that: ">1. The sale, importation, printing or publication of books and any newspaper (including periodical), magazine, review, or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements is exempted from VAT under Section 103 (y) of the National Internal Revenue Code (NIRC), as amended by R.A. No. 8241, and as implemented by Section 4(B)(y) of Revenue Regulations No. 6-97, promulgated January 2, 1997. However, the sale of computers (i.e., a sale of goods) made in the course of trade or business of the seller is subject to VAT pursuant to Section 99, in relation to Section 100, NIRC. LLpr ">2. CD-ROM comes within the purview of the term "goods or properties", hence, the sale thereof made in the course of trade or business of the seller is subject to VAT pursuant to Section 99, in relation to Section 100 of the aforesaid NIRC. An electronic copy of any publication does not come within the purview of the terms "books, newspapers, periodicals, magazine, review or bulletin" for the purpose of VAT exemption as provided under Section 103(y) of the aforesaid NIRC. The said terms only apply to printed matters in hard copy as expressly provided therein. The term "book" has been defined as "A literary composition which is printed; a printed composition bound in volume." (Scoville v. Toland, 21 Fed. Cas. 864, BLACK'S LAW DICTIONARY) ">3. There is an employer-employee relationship when the person for whom services are performed has the right to control and direct the individual who performs the services not only as to the result to be accomplished by the work, but, also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. In this connection, it is not necessary that the employer actually directs or controls the manner in which the services are performed, it is sufficient if he has the right to do so. The right to discharge is also an important factor that the person possessing that right is an employer. Other factors characteristic of an employer, but not necessarily present in very case, are furnishing the tools and furnishing of a place of work to the individual who performs the services. In general, if an individual is subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the result, he is not an employee. (Sec. 5, Revenue Regulations No. 6-82, prom. October 1, 1982) ">4. Yes. Commission paid to sales agents is subject to the Value-Added Tax as the same comes within the purview of gross receipts derived by the agent from the sale of his services made in the course of trade or business pursuant to Section 102, NIRC, as amended. ">5. No. Services rendered by individuals pursuant to an employer-employee relationship are exempted from the value-added tax pursuant to Section 103(o), NIRC, as amended. ">6. CTC's company dealers are considered commercial brokers, hence, subject to the creditable expanded withholding tax pursuant to Section 1(g) of Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94. This withholding tax may only be used by the said company dealers as a tax credit against their respective income tax liability for the same taxable period for which the said tax had been withheld. It may not be used in payment of the monthly remittances of taxes withheld by CTC from income payments made to its own sales agents. ">7. CTC is a withholding tax agent only insofar as its commission payments to the aforesaid company dealers are concerned. For this reason, CTC shall have to itemize the names of these dealers/payees in filing the aforesaid Annual Information Return. CTC is not, however, a withholding tax agent with respect to the sale agents of the aforesaid company dealers since the income payments to these sales agents are made by the aforesaid company dealers rather than by the CTC. The income taxes to be withheld from the income payments to these sales agents shall accordingly be done by the said company dealers who, therefore, shall file the said Annual Information Return vis-a-vis their respective income payments to the said sales agents. ">8. Yes. Interests derived by CTC from the installment sales of its products shall form part of its sales subject to VAT. The rationale for this rule is exemplified in the case of installment sales of real property subject to VAT whereby the principal interests on installment payments are considered part of sales subject to the value-added tax. (See Question and Answer No. 18, Revenue Memorandum Circular No. 3-96, dated January 15, 1996) 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. cdt Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue