BIR Ruling [DA-554-04]

November 8, 2004 BIR RULING [DA-554-04] Rev. Regulations No. 17-2003 DA-113-2003 Bernaldo Mirador & Directo Law Offices Unit 1807 Cityland Condominium 10 Tower 1 6815 Ayala Avenue cor H.V. de la Costa St., Makati City Attention: Atty. Rosario S. Bernaldo Managing Partner Gentlemen : This refers to your letter dated July 19, 2004 requesting in behalf of your client, ZMG Signium Ward Howell, Inc. for a confirmation of your opinion that the service fees of recruitment companies is subject to the 2% withholding tax. It is represented that ZMG Signium Ward Howell, Inc. (COMPANY) is a domestic corporation duly organized and existing under the laws of the Philippines; that the COMPANY is engaged in the business of searching and recruiting prospective employees for its clientele-companies; that it is being paid service fees without charging any fee against the prospective employees. In reply, please be informed that Section 3(E)(3)(k) of Revenue Regulations No. 17-2003 dated March 31, 2003 amended further pertinent provisions of Revenue Regulations No. 2-98, as amended, providing for additional transactions subject to Creditable Withholding Tax, provides as follows: "SEC. 3. INCOME PAYMENTS SUBJECT TO CREDITABLE WITHHOLDING TAX. Sec. 2.57.2 of Revenue Regulations No. 2-98, as amended, is hereby amended as follows: Sec. 2.57.2 Income payments subject to creditable withholding tax and rates prescribed thereon. Except as herein otherwise provided, there shall be withheld a creditable withholding income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines: xxx xxx xxx (E) Income payments to certain contractors On gross payments to the following contractors, whether individual or corporate Two percent (2%) xxx xxx xxx (k) Labor recruiting agencies and/or "labor-only contractors." For this purpose, any person who undertakes to supply workers to an employer shall be deemed to be engaged in "labor-only" contracting where such person does not have substantial capital or investment in the form of tools, equipment, machineries, work premises and other materials and the workers recruited and placed by such person are performing activities which are directly related to the principal business or operations of the employer in which the workers are habitually employed. " A reading of the above regulations discloses that indeed, labor recruitment, is a form of service rendered that is subject to the 2% creditable withholding tax. IN VIEW OF THE FOREGOING, this Office hereby holds that payments made by the clientele-companies of the COMPANY, are subject to a creditable withholding tax at the rate of 2% effective March 31, 2003, in accordance with Section(3)(E)(3)(k) of Revenue Regulations No. 17-2003. 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, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group