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November 16, 2011

BIR RULING NO. 456-11

RR 2-98 as amended by RR 17-03;


RMC 72-04;
BIR Ruling No. 151-90; BIR Ruling
No. 023-09

Law Offices of Siguion Reyna Montecillo & Ongsiako


4th & 6th Floors, Citibank Center,
8741 Pasco De Roxas, Makati City

Attention: Attys. Jose Lis C. Leagogo


& Ma. Corazon U. Del Castillo

Gentlemen :

This refers to your letter dated February 18, 2010 requesting, on behalf of your
client, SWEDISH MATCH PHILIPPINES, INC. (SMPI), confirmation of your
opinion on the following: (1) that SMPI is not required to withhold 1% or 2% EWT
upon presentation of the credit card to the supplier; and (2) that SMPI is required to
withhold 2% EWT on the interest payment and/or service fee and other charges
imposed by the credit card company.

It is represented that SMPI, with Taxpayer Identification No. 000-363-177-000,


is a domestic corporation registered with the Securities and Exchange Commission
(SEC) under SEC Registration No. 187000; that its primary purpose for which it was
organized is to manufacture, produce, purchase, import or otherwise acquire, and sell,
export or otherwise dispose of, lighters and the machinery, equipment and component
parts for manufacturing lighters; that its principal office is located at 104 Technology
Avenue, Laguna Technopark Special Economic Zone, Bian, Laguna; that it is a
wholly-owned subsidiary of Swedish Match A.B., a company organized and existing
under the laws of Sweden; that on 14 March 2007, SMPI was classified by the Bureau
of Internal Revenue (BIR) as one of the Top Ten Thousand (10,000) Private
Corporations (TTC) for tax purposes; that SMPI has numerous suppliers of goods and
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services that it pays by credit cards, such as utility providers; that upon purchase, the
suppliers issue their own official receipts and card transaction slips to SMPI; that
instead of collecting the payment from SMPI, the suppliers collect from the card
issuer; and that the card issuer then collects from SMPI for the payments it made to
the suppliers.

In reply, please be informed that Revenue Memorandum Circular (RMC) No.


72-2004 1 provides that: SCaTAc

"Q20. If the payment for the purchase of goods or services to their regular
suppliers by the TTC/GO/LT is through credit card or through company
issued credit card to officers/employees for purposes of reimbursements,
will the TTC/GO/LT be required to withhold the tax when it presents the
credit card to the supplier?

A20. The TTC/GO/LT is not required to withhold the tax upon presentation of
the credit card to the supplier. The TTC/GO/LT, however, is required to
withhold the 2% expanded withholding tax corresponding to the interest
payment and/or service fee and other charges imposed by the credit card
company. The credit card company, on the other hand, shall withhold
1% of 50% of the gross amount paid to any business entity pursuant to
Section 2.57.2(L) of RR 2-98, as amended." (Emphasis supplied)

On the other hand, Sec. 2.57.2 (M) of Revenue Regulations (RR) No. 2-98, as
amended by RR No. 14-2008, provides:

"(M) Income payments made by the top twenty thousand (20,000)


private corporations to their local/resident supplier of goods and local/resident
supplier of services other than those covered by other rates of withholding tax.
Income payments made by any of the top twenty thousand (20,000) private
corporations, as determined by the Commissioner, to their local/resident
supplier of goods and local/resident supplier of services, including non-resident
alien engaged in trade or business in the Philippines.

Supplier of goods - 1%

Supplier of services - 2%

xxx xxx xxx"

The 1% and 2% tax rate on income payments will only apply in cases of
income payments made by top 20,000 corporations to supplier of goods or services

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which are not subject to any specific withholding tax rates provided in the said
revenue regulations. (BIR Ruling No. 023-09 dated November 26, 2009)

In BIR Ruling No. 151-90 dated August 16, 2006, this Office illustrated the
nature of the business of credit cards, to wit:

"In reply, please be informed that based on the foregoing facts, the credit
card company generates revenues principally from discount granted by the
establishment and incidentally from fees paid by the cardholder; and that the
credit card company finances the cardholder for the latter's purchases on credit,
since said purchases are paid by the company prior to billing the cardholder.
Accordingly, these activities fall within the purview of finance companies, or
similar to it, as defined in Section 11 of P.D. No. 1739, which reads as follows:
aIcSED

(ee) The term "finance companies" refers to


corporations or partnerships other than a bank, or insurance
company, primarily organized for the purpose of extending
credit facilities to consumers and to industrial, commercial or
agricultural enterprises whether by granting direct loans or by
discounting or factoring commercial papers or accounts
receivables for profit, buying and selling contracts, leases,
chattel mortgages and other evidences of indebtedness arising
out of one or more of the steps in the distribution and sale of
commodities."

In case of purchases using a credit card, the merchant/service establishment


(M/SE) allows the customer (i.e., cardholder) to make the purchase on credit. The said
receivables of the M/SE from the customer or cardholder are then assigned by the
former to the credit card company at a discount for early payment or settlement of the
transaction. What is being sold to and purchased by the credit card companies are the
receivables from purchaser-cardholder. Hence, the payments made by the credit card
companies, which are termed "settlement of accounts", are those receivables
transferred or assigned to them by the merchant. Clearly, such payments are neither
payments for the purchase of goods or services. (BIR Ruling No. 023-09 dated
November 26, 2009)

Considering that it has been settled in several BIR Rulings that a credit card
business is engaged in financing activities with respect to its discounting of
receivables (BIR Ruling No. 023-09 citing BIR Ruling No. 151-06 and BIR Ruling No.
UN-170-95 dated April 19, 1995) and that the credit card company generates revenues
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principally from the discount granted by the establishment and incidentally from fees
paid by the cardholder, therefore, the cardholder is then required to withhold the 2%
expanded withholding tax on the interest payment and/or service fee and other charges
imposed by the credit card company when it subsequently pays the credit card
company.

On the part of the credit card company, Section 2.57.2 (L) of RR 2-98 provides
that a withholding tax of 1% shall be withheld on the 1/2 of the gross amounts paid by
any credit card company in the Philippines to any business entity, whether natural or
juridical person, representing the sales of goods or services made by the aforesaid
business entity to card holders. (BIR Ruling No. 023-09)

In view of the specific provision in Section 2.57.2 (L) of RR 2-98, as amended,


payments made by credit card companies to M/SE for the purchase of receivables are
not subject to the 1% or 2% withholding tax under Section 2.57.2 (M) of RR 2-98 but
rather to the 1% of the 1/2 of the gross amount paid. ACETID

From the foregoing, this Office hereby confirms your opinion that for payment
transactions of SMPI for the purchase of goods or services from its regular suppliers
through credit card:

(1) SMPI is not required to withhold the 1% or 2% EWT as imposed


under Section 2.57.2 (M) of RR 2-98 and pursuant to RMC
72-2004 upon presentation by SMPI of its credit card to suppliers
of goods or services; and

(2) that SMPI is, however, required to withhold the 2% EWT on the
interest payment and/or service fee and other charges imposed by
the credit card company.

This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation, it will be ascertained that the facts are different, then
this ruling shall be considered null and void.

Very truly yours,

(SGD.) KIM S. JACINTO-HENARES


Commissioner of Internal Revenue
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Footnotes
1. November 16, 2004. Clarification of Issues on the Additional Transactions Subject to
Creditable Withholding Tax under Revenue Regulations (RR) No. 17-2003, as
amended by RR 30-2003 and RR 3-2004.

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