May 9, 2007

BIR RULING [DA-289-07]

R.R. 2-98; DA-489-05; DA-523-03

Aranas Consunji Barleta

Law Offices
Unit 106 G/F Le Metropole Building
326 Tordesillas cor. Dela Costa Streets
Salcedo Village, Makati City

Attention: Atty. Jesus Clint O. Aranas

Gentlemen :

This refers to your letter dated April 2, 2007 requesting, in behalf of your clients,
Epson Precision (Phils.), (EPPI), Epson Imaging Devices (Phils.), Inc. (EIPH), Philippines
Epson Optical, Inc. (PEOI), Epson Software Engineering (Phils.), Inc. (ESEP) and Epson
Philippines Corporation (EPC), requesting confirmation of your opinion, viz:
(i) the amounts received by EPPI from EIPH, PEOI, ESEP and EPC in the form of
reimbursements, pursuant to the cost sharing schemes adopted by them,
are not subject to income tax, withholding tax and value-added tax; and
(ii) the income tax pertaining to the salaries of the employees whose services will
be shared by EPPI, EIPH, PEOI, ESEP and EPC may be withheld by EPPI in
behalf of such other Epson companies.
It is represented that the Epson Group of Companies operating in the Philippines,
composed of EPPI, EIPH, PEOI, ESEP and EPC; that EPPI, EIPH, PEOI and ESEP are
registered with the Philippine Economic Zone Authority; that they are primarily engaged
in the development and manufacturing of information-related equipment and
components, such as computers, printers, scanners, projectors, displays, and other
peripherals, as well as semiconductors, electronic devices and precision products; that
to rationalize their operations in the Philippines, the said members of the Epson Group
entered into a Cost Sharing Agreement for Common Services which covers aspects of
their respective processes; that such arrangement for the sharing of expenses for
common services is more cost-e cient than each a liate having its own agent or
contractor to perform the same; that one aspect of such Agreement was the sharing of
the expenses for common services to be performed by certain employees of EPPI,
EIPH, PEOI, ESEP and EPC; that the common services include human resources and
general affairs, accounting, information systems development, facility and safety and
environment services; that for the foregoing services, EPPI, EIPH, PEOI, ESEP and EPC
agreed to share in the expenses therefor in accordance with a pre-determined
percentage ratio; that this ratio is subject to periodic review and adjustments so as to
correspond to the actual amount of work rendered by such employees to EPPI, EIPH,
PEOI, ESEP and EPC respectively; that EPPI shall advance the payment of the salaries
of the employees whose services are shared with EIPH, PEOI, ESEP and EPC; that EPPI
will then bill EIPH, PEOI, ESEP and EPC for the amount corresponding to their
respective share in accordance with the agreed allocation method; that the parties also
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 agreed that it will be EPPI who will withhold the applicable withholding taxes
corresponding to the salaries of such shared employees; that also included in the
Agreement executed by the parties is the use by any of such a liates of the second
oor of the building constructed and being occupied by EPPI; that under this
Agreement, EPPI will share with the other parties the actual expenses incurred by their
joint occupancy of the said building; that the actual expenses include common
transactions expense, electricity, diesel used for generators, canteen expenses, building
maintenance expenses, and such other similar expenses; that the building's
depreciation expense and the value of the amortization of the land upon which the
building is constructed, as well as the amount of real property tax and the re insurance
premium will also be allocated between EPPI and such other parties; that the allocation
of the foregoing expenses is in accordance with an allocation method or percentage
ratio agreed upon by the parties; that for example, for electricity, water, waste and
water treatment, the expenses are allocated based on actual consumption, as indicated
by the parties' separate meters; maintenance expenses such as lubricant oil and fuel
consumption of the generator, divided in accordance with the oor area respectively
occupied by the parties; expenses for the necessary maintenance personnel, shared in
accordance with direct manpower ratio; and the depreciation expense, allocated ratably
based on the space used by the respective parties; that also the subject of a cost
sharing scheme is the expenses for the information technology aspect of the
operations of the various members of the Epson Group, also referred to as the
Information Systems Department (ISD); that EPPI, EIPH, PEOI, ESEP and EPC agreed to
allocate among themselves the expenses for the operation and maintenance of the ISD
facilities such as the main server computer, e-mail environment, WAN connection
environment, anti-virus software, WEB and BPCS environment; that this Agreement also
includes the sharing of the expenses for the personnel operating and maintaining the
said ISD equipment; that for this purpose, EPPI, EIPH, PEOI, ESEP and EPC have a pre-
determined allocation method or percentage ratio by which they establish the portion
of the total ISD expenses pertaining to each of them; that the expenses attributable to
all aspects of the Agreement, as summarized above, are advanced by EPPI; that EPPI
will then bill EIPH, PEOI, ESEP and EPC, as the case may be, for the amount
corresponding to their respective share in accordance with the agreed allocation
method or percentage ratio; that the said bill will then be paid by EIPH, PEOI, ESEP or
EPC to EPPI in the form of reimbursement; that EPPI receives the amounts stipulated
in the agreed allocation method as a mere agent or duciary of EIPH, PEOI, ESEP and
EPC; and that EPPI will not earn any revenue from the reimbursements it will receive
from EIPH, PEOI, or ESEP under their respective Agreements, considering that the
costs allocated among the parties represent the actual combined expenses incurred by
all of the parties, and not by EPPI alone, in the course of their regular operations.
In reply, please be informed that under Section 36 of Revenue Regulations No. 2,
income, in the broad sense, means all wealth which ows into the taxpayer other than
as a mere return of capital. It has been a settled rule that reimbursement of cost is
merely a return of capital and does not constitute income, and consequently, is not the
proper subject of withholding taxes (BIR Ruling No. DA-489-05 dated December 6,
2005; BIR Ruling No. DA-176-04 dated April 6, 2004; BIR Ruling No. DA-438-03 dated
December 4, 2003 citing BIR Ruling Nos. DA-158-97 dated April 14, 1997, UN-262-95
dated July 11, 1995 and 245-95 dated July 5, 1995). IaAHCE

Moreover, in addition to such amounts being mere reimbursements, the sharing

of expenses under the Cost Sharing Agreement for Common Services does not make
EPPI as being engaged in the business of providing business/industrial solutions,
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 manpower, administrative or other allied services. EPPI is, moreover, not rendered
thereby as engaged in the business of leasing real properties. Any amount given by
EIPH, PEOI, ESEP or EPC to EPPI under such Agreement is received by EPPI in its
capacity as an agent or duciary for such other Epson Companies. As such, the
imposition of value-added tax under Section 105 of the Tax Code of 1997 is not
warranted.
With respect to income tax pertaining to the salaries of the employees whose
services will be shared by EPPI, EIPH, PEOI, ESEP and EPEC, Section 2.78.4 (C) of
Revenue Regulations No. 2-98 provides, viz:
"(C) Compensation paid on behalf of two or more employers — If a
payment of compensation is made to an employee by an employer through an
agent, duciary, or other person who has the control, receipt, custody, or
disposal of, or pays the compensation payable by another employer to such
employee, the amount of tax required to be withheld on each compensation
payment made through such agent, duciary, or person shall, whether the
compensation is paid separately on behalf of each employer or paid in lump-
sum on behalf of all such employers, be determined based on the aggregate
amount of such compensation payment or payments in the same manner as if
such aggregate amount had been paid by one employer. Hence, the tax shall be
determined based on the aggregate amount of the compensation paid.
In any such case, each employer shall be liable for the return and
payment of a pro-rata portion of the tax so determined in accordance with the
ration of the amount contributed by each employer relative to the aggregate of
such compensation.
A duciary, agent, or other person acting for two or more employers may
be authorized to withhold the tax under these regulations with respect to the
wages of the employees of such employers. Such duciary, agent, or other
person may also be authorized to make and le returns of the tax withheld at
source on such compensation and to furnish the receipts required under these
Regulations. Application for the authorization to perform such act should be
addressed to the Commissioner or his duly authorized representative. If such
authority is granted by the Commissioner, all provisions of the law (including
penalties) and regulations prescribed in pursuance of the law applicable in
respect of employers."
A duciary, agent, or other person acting for two or more employers may be
authorized to withhold the tax with respect to the wages of the employees of such
employers pursuant to the said revenue regulations. Likewise, such duciary, agent, or
other person may also be authorized to make and le returns of the tax withheld at
source on such compensation and to furnish the receipts required under the above-
cited Regulations.
Thus, EPPI may withhold the corresponding tax on compensation of the subject
employees. It must likewise make and le returns of the tax withheld at source on such
compensation and furnish the receipts thereof in compliance with the provisions of
Revenue Regulations No. 2-98, as amended. SaHTCE

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, this ruling
shall be considered null and void.

Very truly yours,

CD Technologies Asia, Inc. © 2019 cdasiaonline.com
 Commissioner of Internal Revenue
By:

(SGD.) JAMES H. ROLDAN

Assistant Commissioner
Legal Service

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