BIR Ruling [DA-558-06]

September 19, 2006 BIR RULING [DA-558-06] 2-98; VAT Ruling 050-2002 St. Clair Security & Investigation Agency, Inc . #8 Road 3, Project 6 Quezon City Attention: Mr. Jeremias A. Dimbla II General Manager Gentlemen : This refers to your letter dated September 11, 2006 requesting for opinion/ruling regarding the 5% expanded withholding tax being deducted by your clients in your billing for armored vehicle services as well as the basis in computing the withholding tax. It is represented that St. Clair Security & Investigation Agency, Inc. (St. Clair for brevity), is a corporation duly organized and existing under and by virtue of the laws of the Philippines; that it is engaged in the service of providing security in picking up and depositing clients' valuable cargoes, cash, checks or similar goods; that prior to engaging your services to your client, you execute a contract (sample contract attached) setting forth the details of the services to be rendered; that consequently, in your billing to such services, 5% of the total amount is being withheld by your client including the VAT portion of every payment. In reply, please be informed that Sec. 2.57.2 (E)(4)(g) of Revenue Regulations (RR) No. 2-98 as amended by RR No. 6-2001, provides: "Section 2.57.2 Income payment subject to creditable withholding tax and rates prescribed thereon. Except as herein otherwise provided, there shall be withheld a creditable 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 (4) Other contractors xxx xxx xxx (g) Messengerial, janitorial, private detective and/or security agencies, credit and/or collection agencies and other business agencies:" TacESD The sample contract captioned "Agreement for Armored Car Services" attached to said request can be gleaned as contract for security services. The task of St. Clair as mentioned in the contract, is to ensure the safe and speedy transport and/or delivery of cash or checks for deposit. Incidentally in the "whereas clause", it appears that the client of St. Clair was enticed to secure its services because it "has substantial capitalization, and investment in the form of tools, equipment, machineries, personnel , work premises and other materials which are necessary in the conduct of its business and, accordingly, it is capable of satisfying the security requirements of the client ." In short, therefore, the client of St. Clair is not only securing its transport services with the use of its specially designed vehicle but also together with the services of security guards which are under its employ, as a whole. These two components of services are being provided by St. Clair in consonance with its business as service provider. Although the contract executed by St. Clair is captioned as an "Agreement for Armored Car Services", this Office believes that services being provided thereto is security service for the safe and speedy transport and/or delivery of cash or checks for deposit not a mere transportation of cargo. As such, payment to St. Clair for similar services is subject only 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. Furthermore, income payment necessarily pertains to the income paid to and received by the recipient. For purpose of creditable withholding tax on such income payments, it shall be the gross income embracing the cost of materials, overhead costs, labor, etc. but exclusive of the VAT, of the payee. (BIR Ruling No. 073-89). VAT as a tax cannot be subjected 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. ( VAT Ruling No. 050-2002 dated September 11, 2002 ) Accordingly, for purposes of creditable withholding tax on your income payment received from your clients, the tax base shall be the gross income payment net of value-added 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