BIR Ruling [DA-049-05]

February 1, 2005 BIR RULING [DA-049-05] Section 108 BIR Ruling No. 87-92 & DA-098-2001 Mr. Rino M. Basilio No. 11 Cardinal, Dominic I Quezon City S i r : This refers to your letter dated March 18, 2003 requesting, in effect, for a ruling that you are not subject to value-added tax on professionals since you are a fixed income employee. It is represented that after you retired from IBC 13, you were hired by ABC-5 on a contractual basis; that in truth and in fact, your duties and functions are management and executive in nature; that documents would show that you hold the dual position of being the Executive Assistant to the Chairman and Managing Director and the Vice President for Provincial Station Operations of ABC-5; that you were advised by the EVP of ABC-5, Mr. Roberto C. Limgenco to register as VAT taxpayer pursuant to Revenue Regulations No. 19-2002 ( sic ); and that you are reluctant to register since you believe that you are not covered by the VAT law because you receive fixed income as an employee of ABC-5. In reply, please be informed that Section 2.78.3 of Revenue Regulations (Rev. Regs.) No. 2-98, as amended, provides for the legal parameters in determining the existence of employer-employee relationship, as follows: "In general, the relationship of the employer and employee exists when the person for whom services were 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 the result is accomplished. 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 that he has the right to do so. The right to dismiss an employee is also an important factor indicating that the person possessing that right is an employer. Other factors or characteristics of an employer, which may not be necessarily present in every case, are furnishing the tools and furnishing of a place to work, to the individual who performs the services. In general, an individual is not considered an employee if he 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. In general, individuals who follow an independent trade, business, or profession, in which they offer their services to the public, are not employees. The measurement, method or designation of compensation is also immaterial if the relationship of employer and employee in fact exists. HITEaS No distinction is made between classes or grades of employees. Thus, superintendents, managers, and others belonging to similar levels are employees. An officer of a corporation is an employee of the corporation. An individual, performing services for a corporation, both as an officer and director, is an employee subject to withholding on compensation, including director's fees." On the other hand, Sec. 2.78.4 of Rev. Regs. 2-98, as amended defines employer" to mean, viz : "...any person for whom an individual performs or performed any service, of whatever nature, under an employer-employee relationship. It is not necessary that the services be continuing at the time the wages are paid in order that the status of employer may exist. Thus, for purposes of withholding, a person for whom an individual has performed past services and from whom he is still receiving compensation is all 'employer'." Moreover, Section 2.78.1(B)(4) provides, viz : "(4) Remuneration for casual labor not in the course of an employer's trade or business . The term 'casual labor includes labor which is occasional, incidental or irregular. The expression 'not in the course of the employers trade or business' includes labor that does not promote or advance the trade or business of the employer. Thus, any remuneration paid for labor which is occasional, incidental or irregular, and does not promote or advance the employer's trade or business, is not considered as compensation. xxx xxx xxx Any remuneration paid for casual labor, that is, labor which is occasional, incidental or irregular, but which is rendered in the course of the employer's trade or business, is considered compensation. xxx xxx xxx An any remuneration paid for casual labor performed for a corporation is considered as compensation." Applying the foregoing, it would appear that you are actually an employee of ABC-5. While your services as Executive Assistant to the Chairman and Managing Director and as Vice President for Provincial Station Operations may be casual, they are rendered in the course of ABC-5's business and therefore the remuneration paid for such services is considered as compensation. Such being the case, it is incumbent upon ABC-5 to withhold from your salaries the income tax due thereon pursuant to Section 2.79 of Revenue Regulations No. 2-98, as amended. Please be advised that under Section 2 of Revenue Regulations (RR) No. 19-99, implementing Section 108 of the Tax Code of 1997, in relation to Section 17 of Republic Act (R.A.) No. 7716, as amended by Section 11 of R.A. No. 8241, professionals became subject to VAT beginning January 1, 2000. Other issuances announcing the implementation of VAT on professionals include RR No. 1-2003 implementing Section 5 of R.A. No. 8424, as last amended by Section 1 of RA 9010, which subjects services rendered by professionals to VAT beginning January 1, 2003. The imposition of VAT on such services are likewise governed by the provisions of RR No. 7-95, as amended, otherwise known as "The Consolidated VAT Regulations." On the other hand, Revenue Memorandum Circular (RMC) No. 6-2003 defined the term "profession or calling" as applying to profession requiring passage in a government examination before a person can engage in the exercise thereof such as the one which requires license from the Professional Regulation Commission (PRC) or other government agencies, or the practice of law in the Philippines authorized by the Supreme Court. Individual professional practitioners liable to pay the professional tax under the Local Government Code are those required to register as VAT-taxpayers under RR No. 1-2003. The same RMC clarified that the performance of services rendered by individual professional practitioners who are subject to VAT or percentage tax, whichever is applicable, beginning January 1, 2003, should not be in pursuit of an employer-employee relationship between the service-provider and the service-recipient. In view of the foregoing, it is the opinion of this Office that you are not covered by the VAT Law, therefore, not subject to the payment of VAT since you render services under an employer-employee relationship. EcAISC 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 as null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group