BIR Ruling [DA-098-01]

May 28, 2001 BIR RULING [DA-098-01] Sec. 57; R.R. 02-98 000-00 Philippine Coconut Authority Elliptical Road, Diliman Quezon City Attention: Shirley T . Aquino Chief, Accounting Division Gentlemen : This refers to your letter dated October 19, 2000 requesting for a ruling whether the salaries of your contractual personnel are subject to withholding of income tax on compensation. It is represented that you have eleven (11) contractual personnel; and that in the "Contract of Service" of these contractual personnel, it is stipulated that there is no employer-employee relationship between said contractual personnel and the Philippine Coconut Authority (PCA for brevity). In reply, please be informed that after consideration of the terms of the "Contract of Service" and the law applicable thereto, we find that there exists an employer-employee relation between you and said contractual personnel. Section 2.78.3 of Revenue Regulations 2-98 dated April 17, 1998 (Implementing Republic Act No. 8424, "An Act Amending The National Internal Revenue Code, as amended" relative to the Withholding on Income subject to the Expanded Withholding tax and Final Withholding Tax, Withholding of Income Tax and Other Percentage Taxes.), provides that: "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. AICDSa 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. 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." Applying the foregoing legal parameters to the "Contract of Service", between you and your alleged contractual personnel, it is the considered opinion of this Office that said contractual personnel are actually your employees. You exercise control over these contractual personnel not only as to the result to be accomplished but also as to the manner by which the result will be accomplished. The "Contract of Service" between you and Mr. Shem Cesar R. Porras provides that: "That the performance of the SECOND PARTY shall be supervised by the IMMEDIATE SUPERVISOR based on the existing performance evaluation system adopted by the PCA; . . ." The other "Contract of Service" attached to your letter contains a similar provision. You also have the right to dismiss said contractual personnel. The same "Contract of Service" provides that: "That the Contract of Service may be terminated for any reason subject to a thirty (30) day written notice." The other "Contract of Service" likewise contains a similar provision. The fact that in the "Contract of Service", it is stipulated that there shall be no employer-employee relation between said contractual personnel and the PCA does not, ipso facto , negate the existence of such relation. Premises considered, it is incumbent upon you to withhold from the salaries of said employees the income tax due thereon pursuant to Section 2.79 of Revenue Regulations No. 2-98 dated April 17, 1998 (Implementing Republic Act No. 8424, "An Act Amending The National Internal Revenue Code, as amended" relative to the Withholding on Income subject to the Expanded Withholding tax and Final Withholding Tax, Withholding of Income Tax and Other Percentage Taxes.). Very truly yours, (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group