BIR Ruling [DA-565-04]

November 9, 2004 BIR RULING [DA-565-04] 039-92 dtd 3-26-92 Industrial Commercial Manpower Services, Inc . Unit 503 5th Floor Pacific Center Bldg. San Miguel Ave. Ortigas Center Pasig City Attention: Ms. Mauricia A. Santiago Chief Accountant Gentlemen : This refers to your letter received by this Office on June 17, 2004, seeking clarification on whether or not the Emergency Cost of Living Allowance (ECOLA) of employees involved in service activities is included as tax base for VAT purposes and lastly, if you could still legally amend your return for taxable year 2001 to incorporate deficiencies against the negative payable balance in the original return. It appears from records that you are a service provider of manpower to various clients; that you are a VAT-Registered entity; that per Billing Invoice, you billed your ECOLA separate from the GROSS; that it is your position that in computing the 10% VAT on your gross receipt, you exclude the ECOLA for the purpose; and, that in connection with your other Reconciled Deficiencies subject to tax for taxable year 2001, it is your position that you have to amend your tax return and incorporate the deficiencies against the negative payable balance in the original return; that the net deficiency be subject to interest and surcharges. In reply, please be informed as follows: 1. The term "compensation income" means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code. The name by which the remuneration for the services is designated is immaterial. Thus, salaries, wages, emoluments, and honoraria, allowances, commissions (e.g. transportation, representation, entertainment and the like, fees including director's fee if the director is, at the same time, an employee of the employer/corporation, taxable bonuses and fringe benefits, except those which are subject to the fringe benefit tax under Section 33 of the Tax Code, taxable pensions and retirement pay, and other income of a similar nature constitute compensation income. Remuneration for services constitutes compensation even if the relationship of employer and employee does not exist any longer at the time when payment is made between the person in whose employ the services had been performed and the individual who performed them. [Sec. 2.78.1(A), Revenue Regulations No. 2-98] In applying the above-cited regulations to the case at bar, the ECOLA, mandated by Wage Order No. 9 and received by the employees form part of their compensation income subject to withholding tax. [BIR Ruling DA-198-2002 dated November 8, 2002] On the other hand, VAT is imposed on the seller of services based on 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 year for the services performed or to be performed for another person, excluding value-added tax pursuant to Section 102 of the Tax Code [Vat Ruling No. 039-92 dated March 26, 1992]. IaDTES Pursuant to Section 102(a) of the Tax Code, as amended, the VAT shall be based on the total gross receipts, which includes salaries and allowances of the employees, the SSS and medicare contributions to the government, administrative overhead plus margin of profit or agency fee. This finds support under VAT Ruling No. 232-89. Accordingly, your opinion to exclude ECOLA as tax base for VAT purposes is untenable. 2. As to your intention to amend your tax return for taxable year 2001, Section 6(A) of the Tax Code of 1997 as implemented by Section 4.2.2, Revenue Regulations No. 12-99 thereof provides that any tax return filed by a taxpayer may be modified, changed or amended by the taxpayer within three (3) years from date of such filing, provided, however, that no notice for audit or investigation of such return, statement or declaration has, in the meantime, been actually served upon the taxpayer. 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group