FPD Asia Property Services, Inc.

December 21, 2009 BIR RULING [DA-(VAT-116) 796-09] RMC 26-09; BIR Ruling No. DA-122-2008 FPD Asia Property Services, Inc. 5/F Net One Center, 26th St. cor. 3rd Ave. Crescent Park West, Bonifacio Global City 1634 Taguig City Attention: Mr. Honesto C. Tabligan Finance and Corporate Services Manager Gentlemen : This refers to your letter dated March 5, 2009 requesting for clarificatory ruling on the following issues: "1. What are the BIR implications on reimbursements of labor costs and service fees from FPD's clients? 2. Are reimbursable costs, labor costs, of FPD subject to VAT? 3. Single transaction may involve payment for service fee and reimbursements of labor costs, how will be the manner of issuance of OR? Will it matter issuing Provisional Receipts for the labor costs reimbursements? 4. What is the coverage or applicability of Sec. 108(A) of the National Internal Revenue Code (NIRC), with emphasis on exception? Can this be invoked by FPD? 5. What is the applicability of the Revenue Memorandum Circular (RMC) No. 39-2008 for Security Guards? Is this applicable to us?" As represented, FPD Asia Property Services, Inc. (formerly, FPD Savills Philippines Inc.) is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines. It is registered with the Securities and Exchange Commission under SEC Registration No. 174781 issued on December 6, 2001. The primary purpose for which it was incorporated is as follows: "To manage, administer, operate, maintain, establish, own, develop and carry on the business of managing, administering, operating, maintaining, establishing, owning, developing, preserving, condominium projects, townhouse projects, shops, counters, factories, plants, warehouses and such other structures or improvements, intended for residential, office commercial, industrial, recreational or mixed-use, as well as to render janitorial services and window cleaning, to undertake additional carpentry works, plumbing, electrical, painting, landscaping, gardening, ground maintenance services, including generally all such services for maintenance, repair and beautification of such buildings, structures and improvements and its ground, the installation, repair and maintenance of building and improvements and its ground, the installation, repair and maintenance of building equipment and facilities, office machines, air conditioning equipment, electrical appliances, automotive repairs and any other such allied miscellaneous repairs and services, to provide the services of messengers, laborers, factory workers, elevator operators, clerks, typists and other similar types and classes of workers for such buildings, structures and improvements, and to do any act designed for the management, administration, operation, maintenance, establishment, ownership and development of such buildings, structures and improvements." DAcaIE FPD's basic business existence is anchored to its mandate of providing services to condominiums and other commercial establishments. Thus, deploying manpower ranging from Building Manager down to the last staff of their requirements. FPD's business process involves the following services: 1. Managing the building; 2. Managing the financial aspects which basically involves banking and other investments activities; 3. Managing the accounting which involves collection, recording and preparation of financial reports; 4. Coordinating with other governmental agencies for compliance; and 5. Other inherent services to its operations. In lieu of the services rendered by FPD to its clients, FPD receives correspondingly the following: a. Labor Costs these are the reimbursements for the actual personnel costs incurred arising from the Service Agreement. These costs vary depending on days rendered, lates, absences, overtime and undertime of the personnel actually deployed. b. Service Fee this is a fixed amount agreed for the services being rendered. In reply, please be informed that in the case of Protector's Services, Inc. vs. Court of Appeals and Commissioner of Internal Revenue, G.R. No. 118176 dated April 12, 2000, the Supreme Court defined "gross receipts" as follows: "Contractor's tax on gross receipts imposed on business agents including private detective watchman agencies was a tax on the sale of services or labor, imposed on the exercise of a privilege. The term "gross receipts" means all amounts received by the prime or principal contractor as the total price, undiminished by the amount paid to the subcontractor under a subcontract arrangement. Hence, gross receipts could not be diminished by employer's SSS, SIF and Medicare contributions." For purposes of computing gross receipts on the part of a seller of services, reimbursements of labor costs and service fees form part of gross receipts subject to VAT considering that salaries and wages of employees of service-oriented entities are considered direct costs. Since both payments (labor costs and service fees) are subject to VAT, the seller is required to be VAT registered and issue VAT receipts. Section 108 of the NIRC does not emphasize on exception from payment of VAT which is found in Section 109. Rather, Section 108 is a catch all provision since it refers to all kinds of services in the Philippines. To invoke exception from payment of VAT, FPD must refer to Section 109 but it cannot invoke Section 108 of the Code. In the above quoted decision, the Supreme Court also held "Furthermore, it has been consistently ruled by the BIR that the salaries paid to security guards should form part of the gross receipts, subject to tax, to wit: '. . . This Office has consistently ruled that salaries of security guards form part of the taxable gross receipts of a security agency for purposes of the 4% [formerly 3%] contractors tax under Section 205 of the Tax Code, as amended. The reason is that the salaries of the security guards are actually the liability of the agency and that the guards are considered their employees ; hence, for percentage tax purposes, the salaries of the security guards are includible in its gross receipts. (BIR Ruling No. 271-81 citing BIR Ruling No. 69-002)' xxx xxx xxx WHEREFORE, the assailed decision of the Court of Appeals, in CA-G.R. SP 31825, is AFFIRMED. . . ." However, Section 1, Rule XIV of the 1994 Revised Rules and Regulations implementing Republic Act No. 5487, as amended, governing the "Organization and Operation of Private Security Agencies and Company Security Forces throughout the Philippines," places the primary obligation on the client to pay the salaries of the security guards and requires that the monies received by the security agency representing salaries shall be earmarked and segregated for the said guards, and not form part of the security agency's gross income and taxable gross receipts when actually or constructively received. Unlike in the case of security agencies wherein the primary obligation to pay the salaries of the security guards rests on the clients, the primary obligation to pay the salaries of the workers of other service providers rests not on their clients but on the service providers themselves. This places the security agencies on a tax situation different from other service providers. Thus, excluding security agencies from the coverage of business agents or service providers referred to in the decision cited above. HTaSEA RMC No. 39-2007 is exclusive to security agencies. There is nothing in the context of RMC No. 39-2007 that would manifest or suggest the intention to have the RMC apply to manpower agencies i.e., janitorial and clerical services, other than security agencies. Moreover, in the interpretation of statutes, it is the established rule not to extend their provisions by implication, beyond the clear import of the language employed, or to enlarge their scope as to include matters not specifically pointed out. It is clear from your representation that FPD is an entity engaged in providing various kinds of service other than that of a security agency; hence, RMC No. 39-2008 does not apply to it. In view of the foregoing, clients of service providers like FPD are required to deduct and withhold the 2% creditable tax on its income payments to manpower agencies inclusive of salaries, SSS, Philhealth and Pag-ibig contributions pursuant to Section 2.57.2 (E) (3) (k) of Revenue Regulations (RR) No. 2-98, as amended by RR No. 17-2003. The 2% withholding tax is based on the gross receipts received by the business agencies which include the agency commission plus salaries and the aforesaid contributions net of VAT. Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service