May 25, 2010

BIR RULING [DA-(C-018) 075-10]

RMC 26-09 & Sec. 2.57.2 (E) (4) (g), RR 2-98,

as amended;
BIR Ruling Nos. 028-80, VAT-085-89, DA-
565-04, DA-122-08 & DA-219-08

Wistron InfoComm (Philippines) Corporation

#4 Rizal Highway cor. Aim High Avenue
Subic Bay Industrial Park Phase I
Subic Bay Freeport Zone
Attention: Mr. Peter Kang
Finance Director

Gentlemen :

This refers to your letter dated September 25, 2008 stating that Wistron
InfoComm (Philippines) Corporation ("Wistron") will be entering into a contract with a
manpower agency to support its requirement during peak season. Based on the
foregoing, you now inquire on the following:
1. What will be the basis of the withholding tax? Would it be the gross billing
or only the agency fee?
2. For purposes of billing, is the agency required to separate the actual
salaries from the mark up?
3. What are the requirements the agency has to submit to your company?
In reply, please be informed that Revenue Memorandum Circular No. 26-2009
emphasized that the basis of withholding tax whether creditable or nal, is the gross
income without any qualification.
In the case of Protector's Services, Inc. vs. Court of Appeals and Commissioner
of Internal Revenue, G.R. No. 118176 dated April 12, 2000, the Supreme Court held that
the term "gross receipts" means all amounts received by the prime or principal
contractor as the total price, undiminished by the amount paid to the subcontractor
under a subcontract arrangement. Hence, gross receipts could not be diminished by
employer's SSS, SIF and Medicare contributions. The salaries form part of the taxable
gross receipts of the agency for purposes of the 2% withholding tax and the 12% VAT.
The reason is that the salaries are actually the liability of the agency and that the
employees are considered the agency's employees. Hence, for tax purposes, the
salaries are includible in the agency's gross receipts. TCIHSa

But this is not true in the case of security agencies because of Section 1, Rule XIV
of the 1994 Revised Rules and Regulations implementing Republic Act No. 5487, as
amended, governing the "Organization and Operation of Private Security Agencies and
Company Security Forces throughout the Philippines," which places the primary
obligation on the client to pay the salaries of the security guards and requires that the
monies received by the security agency representing salaries shall be earmarked and
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 segregated for the said guards, and not form part of the security agency's gross
income and taxable gross receipts when actually or constructively received.
For purposes of computing the withholding tax, this O ce had occasion to rule
in BIR Ruling No. DA-122-2008 dated March 4, 2008, as follows:
"In reply, please be informed that for purposes of creditable withholding tax on
such income payments, the tax base shall be the gross income embracing the
cost of personnel and agency income, etc., but exclusive of the VAT, of the payee.
VAT as a tax cannot be subject 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. Likewise, the tax
base in computing the value-added tax on the sale of services is gross receipts
which means the total amount of money or its equivalent representing the
contract price, compensation or service fee, including the amount charged for
materials supplied with the services and deposits or advance payments, actually
or constructively received during the taxable quarter for the services performed or
to be performed for another person.
Accordingly, for CRR Service Corporation's income payment received from its
clients, the tax base shall be the gross income payment net of value-added tax. As
such, it is subject to 2% withholding tax pursuant to Section 2.57.2 (E) (4) (g) of
Revenue Regulations (RR) No. 2-98 as amended by RR No. 6-2001, and 12% VAT
based on the total gross receipts or gross income pursuant to Section 108 of the
Tax Code of 1997, as amended."

In view of the foregoing, clients of service providers, other than security agencies,
are required to deduct and withhold the 2% creditable tax on its income payments to
manpower agencies inclusive of salaries, SSS, Philhealth and Pag-ibig contributions
pursuant to Section 2.57.2 (E) (3) (k) of Revenue Regulations (RR) No. 2-98, as
amended by RR No. 17-2003. The 2% withholding tax is based on the gross receipts
received by the business agencies which include the agency commission plus salaries
and the aforesaid contributions net of VAT.
Questions nos. 2 and 3 do not involve legal issues, hence, beyond our jurisdiction.
You may, however, address your queries to the Operations Group.
Please be guided accordingly. DSHTaC

Very truly yours,

Commissioner of Internal Revenue

By:
(SGD.) GREGORIO V. CABANTAC
Deputy Commissioner
Legal and Inspection Group

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