July 14, 2006

BIR RULING [DA-427-06]

DA 337-00

V.C. Mamalateo & Associates

Unit 6 C, 20 Lansbergh Place
170 T. Morato Avenue corner Castor Street
Quezon City

Attention: Atty. Vic C. Mamalateo

and
Atty. Lino Ernie M. Guevara

Gentlemen :

This refers to your request letter dated January 25, 2006 as well as
your supplemental letter dated May 24, 2006 stating that your client,
CHEVRON (PHILIPPINES), INC. (CHEVRON) [formerly known as Caltex
(Philippines), Inc.], a corporation organized under Philippine laws, is
launching a marketing tool to be called StarCash Card which will come in
P500, P1,000, P1,500, P2,000, P3,000 and P5,000 denominations; that the
StarCash Card will have a one-year expiry period; that it will be issued to
various high profile businesses or corporate clients like automotive or car
manufacturers and dealers, electronics and the likes which can be used as a
co-branded promotional tool; that the StarCash Card will also be issued to
various CHEVRON retail stations strategically located all over the country for
distribution to their respective customers; that the primary aim of your client
in issuing the StarCash Card is to use it mainly as a marketing tool to
generate additional sales for its various retail stations, which ultimately
redound to the over-all profitability on the part of CHEVRON; that the
StarCash Card has been launched in other countries, particularly in New
Zealand, Australia and Thailand, with encouraging results in achieving the
company's objectives; that the launching of StarCash Card in the Philippines
is intended to duplicate its successful introduction in other countries; that
this tool targets to educate and migrate business customers away from cash
and towards card-based transactions, thus, facilitating repeat spending and
fortifying customer loyalty; that based on experience in other jurisdictions,
the issuance of the StarCash Card generates brand-seeking behavior for
CHEVRON products by encouraging repeat visits of customers to different
CHEVRON retail sites; that CHEVRON, with its main thrust of using the card
as a marketing tool, does not expect any income from the issuance of the
StarCash Cards; that the incidental revenue to be generated therefrom
(which may be in the form of merchant fees or breakage or full/partial
forfeiture fees) is minimal and may just be sufficient to cover the costs for
the printing and issuance of the cards; that based on the foregoing features,
the StarCash Card is different with the StarCard previously issued also by
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 CHEVRON; and that unlike StarCard which is in the nature of a credit card
used in purchasing goods and services from a participating CHEVRON retail
station, StarCash Card is not a credit card and is equivalent to cash.
Based on the foregoing representations, you now request confirmation
of your opinion on the following:

1. CHEVRON will not be treated as a financing company subject to

Gross Receipts Tax (GRT), for the issuance of StarCash Cards
to selected corporate clients and retail stations;

2. The amount remitted by the customers to CHEVRON upon

issuance of the cards will not be treated as sales subject to
the 12% VAT; and

3. The amount remitted to CHEVRON will not be regarded as

income payment subject to creditable withholding tax (CWT).
In reply thereto, please be informed as follows:
CHEVRON is not a financing company, therefore, not subject to Gross
Receipts Tax.
Section 2.7 of Revenue Regulations No. 9-2004 dated June 21, 2004,
implementing Republic Act No. 9238 , which took effect on January 1, 2004,
defines financing companies as follows:
"2.7. Financing Companies . — shall refer to corporations except
banks, investment houses, savings and loan associations, insurance
companies, cooperatives, and other financial institutions organized or
operating under other special laws, which are primarily organized for
the purpose of extending credit facilities to consumers and to
industrial, commercial, or agricultural enterprises, by direct lending or
by discounting or factoring commercial papers or accounts receivables,
or by buying and selling contracts, leases, chattel mortgages, or other
evidences of indebtedness, or by financial leasing of movable as well
as immovable properties (R.A. No. 5980, as amended by R.A. No.
8556).
From the foregoing circumstances, it is clear that CHEVRON is a
domestic corporation engaged in the importation and sale of petroleum
products as well as the manufacture of other petroleum products such as
lubricants. Thus, it is not engaged in any business activity as a financing
company as defined above. In the instant case, the issuance of the StarCash
Cards is mainly a marketing tool to generate additional sales for CHEVRON
products as the acceptability of the StarCash Cards will be limited to
CHEVRON retail stations and cannot be used to purchase goods or services
from other establishments or merchants.
Similarly situated are BIR Ruling No. 209-99 dated December 28, 1999
and later reiterated in BIR Ruling No. DA377-00 dated September 7, 2000,
where this Office ruled that —
"The merchant service fees paid by the Shell dealers to PSPC for
brokering the sale, helping generate higher sale and for assuming the
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 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 of 1997.

"Accordingly, since the merchant service fees and charges are

payments for services rendered in the Philippines and PSPC is not a
financing company, the 5% gross receipts tax prescribed under Section
122 of the Tax Code of 1997 shall not be imposed."

The StarCash Card issued by CHEVRON is equivalent to cash and is not

in the nature of a credit card. CHEVRON is not in any way advancing or
financing the purchases of the customers or purchasing any receivables
to/from the service establishments similar to that of a credit card transaction
but is merely reimbursing the retail stations upon use of the cards equivalent
to the amount of goods or services purchased by the StarCash Cardholders.
Consequently, CHEVRON cannot be regarded as engaging in any activity or
business of financing that is subject to GRT.
CHEVRON's issuance of StarCash Card is not subject to 12% Value-Added Tax
(VAT).
CHEVRON is not selling any goods or services to its clients upon
issuance of the StarCash Cards to the latter, thus, not subject to 12% VAT.
The value-added tax will be assessed and collected on every sale, barter or
exchange of properties as well as sale or exchange of service, including the
use or lease of properties (Sections 106 and 108, Tax Code of 1997, as
amended by R.A. No. 9337 ). The issuance of such cards to the corporate
clients and to the retail stations does not fall under the category of goods or
services as contemplated under our VAT law. Note that it will be the various
CHEVRON retail stations which will be selling goods or services to the
customer upon the latter's use of the StarCash Card in that particular retail
station. Hence, the issuance by CHEVRON of said StarCash Cards to its
customers will not be subject to VAT. Being a non-VAT transaction, CALTEX
will be issuing a non-VAT invoice to document the transaction.
The amount received by CHEVRON from corporate clients and retail stations
upon issuance of StarCash Cards will not be subject to withholding taxes.
The amount received by CHEVRON from corporate clients and retail
stations upon issuance of the StarCash Cards will not be subject to
withholding taxes at the rate of 1% (for sale of goods) or 2% (for the sale of
services) as prescribed under Revenue Regulations No. 17-2003. This is
because CHEVRON is not selling any goods or services to its customers upon
the issuance of the StarCash Cards to the latter as it did not part with any
goods or products upon the issuance of the said cards. Neither did it render
any service to the customers when it issued the StarCash Cards upon which
it received the cash equivalent of the amount of the cards issued, net of
discount.
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 The StarCash Cards being issued by CHEVRON are not the goods being
sold per se, but are only used as tools to facilitate the purchase of goods or
services at the particular retail station of their choice. It is not CHEVRON but
the particular CHEVRON retail stations, where the StarCash Cards will be
eventually used by the holder thereof, which will sell the goods or services
available for sale to the user or customer. The consideration received by
CHEVRON when it issues the cards to its customers is not an income
payment to CHEVRON, which should be subject to withholding tax. Instead,
said payment received by CHEVRON is booked or recognized as a 'liability'
on its part being the amount to be remitted subsequently to the particular
CHEVRON retail station upon use of such card. On the other hand, the cards
received by CHEVRON's clients will be booked as 'asset'. Therefore, the
amount received, not being revenue or income on the part of CHEVRON,
should not be subject to withholding tax.
It will be the CHEVRON retail stations that will be the one to recognize
income from the sale of goods or services purchased by the Starcash
Cardholder from the said retail station. Thus, it is clear that CHEVRON is not
the one selling its goods or services. Accordingly, since what CHEVRON
received in exchange for issuing the card is not an income payment arising
from the sale of goods or services to the corporate clients and retail stations,
the amount received will not be subject to withholding tax. Note that, it is
only in the event of non-use of the card within its validity period, or in case
of breakage or loss of the cards (i.e., 'breakage income') can CHEVRON
recognize income or revenue earned from the sale of said cards. In this
regard, such breakage income will be recognized by CHEVRON as part of its
taxable income subject to ordinary corporate income tax.
Merchant fees earned by CHEVRON from the retail stations will be subject to
income tax and VAT.
The merchant fees equivalent to an agreed percentage of the revenue
earned by CHEVRON from the retail station will be subject to the Value-
Added Tax. Since the service for the amount received by CHEVRON is
rendered by the latter in the Philippines to the various retail stations, the
same will be subject to the 12% VAT. 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, whether in kind or cash
(Section 5, Republic Act No. 9337, in relation to Section 4.108-2, Revenue
Regulations No. 16-05 ). The merchant fee is being paid by the retail stations
for the services rendered by CHEVRON in assisting the retail stations to
generate additional sales for CHEVRON goods and services. Likewise, the
merchant fees earned by CHEVRON will be reported as part of its taxable
income subject to ordinary corporate income tax.
Finally, if the merchant fee is paid by a retail station which is a
corporation belonging to the Top Ten Thousand Private Corporations as
determined by the BIR, the same will be subject to the 2% creditable
withholding tax for the supply of services. Otherwise, said payments to
CHEVRON will not be subject to any withholding tax.

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 WHEREFORE, in view of the foregoing premises, this Office holds that
—
1. CHEVRON will not be treated as a financing company subject to the
GRT for the issuance of StarCash Cards to selected corporate clients and
retail stations.
2. The issuance of said StarCash Cards by CHEVRON to its customers
will not be subject to VAT. Being a non-VAT transaction, CHEVRON will be
issuing a non-VAT invoice to document the transaction.
3. CHEVRON is neither a supplier of goods or services upon issuing the
cards to a Top Ten Thousand Private Corporation subjecting the payment
thereof to the corresponding withholding tax on the supply of goods or
services.
4. The merchant fees earned by CHEVRON from the retail stations are
subject to the 12% VAT.
5. Finally, the merchant fees paid by a retail station which is a
corporation belonging to the Top Ten Thousand Private Corporations will be
subject to the 2% creditable withholding tax for the supply of services as
prescribed in Revenue Regulations No. 17-2003. Otherwise, said payments
to CALTEX will not be subject to any withholding tax.
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.) JAMES H. ROLDAN

Assistant Commissioner
Legal Service

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