BIR Ruling No. 001-10

February 3, 2010 BIR RULING NO. 001-10 E.O. 782 Teresa A. Cancino Chief, Accounting Division BIR National Office Building, Agham Road, Quezon City Madam : This refers to your request for legal opinion whether the service fee paid to the job-order personnel is subject to withholding tax. Executive Order (E.O.) 782 dated February 10, 2009 was enacted "Instituting Measures to Assist Workers Affected by the Global Financial Crisis and Temporary Filling Up of Vacant Positions in the Government". DOLE-DBM Joint Circular No. 01-09 dated March 23, 2009 provided the Implementing Guidelines of EO 782 and states that all departments and agencies of the government, including government-owned and/or -controlled corporations and government financial institutions, are authorized to set aside 1.5% of their MOOE to hire personnel on job-order basis, preferably the displaced workers and/or their dependents of employable age, for a period not to go beyond December 31, 2009. Pursuant to this, the Bureau of Internal Revenue (BIR) is authorized to hire personnel on a job-order basis, preferably the displaced and/or their dependents of employable age on a period not exceeding six (6) months. THIASE In the Contract of Services executed by and between the BIR and job-order personnel, the latter's services is engaged for a period starting September 1, 2009 to December 31, 2009 for which a monthly service fee in the amount of Nine Thousand Eight Hundred Pesos (P9,800.00) payable in semi-monthly installments. Absences, tardiness or under-time shall be deducted accordingly. The job-order personnel is required to perform services eight hours a day for five (5) days. The Accounting Division is currently deducting 10% expanded withholding tax and 3% percentage tax under the assumption that it is a service fee. Please be informed that 2.4 of DOLE-DBM Joint Circular No. 01-09 provides: "2.4 Per Civil Service Commission Memorandum Circular No. 17, s. 2002, services rendered by job order personnel shall not be considered as government service. Moreover, said personnel are only entitled to the basic salary of the position." Moreover, under CSC Memorandum Circular No. 38, s. 1993 (now reproduced under Rule XI, Omnibus Rules on Appointment and Other Personnel Actions/CSC Memorandum Circular No. 40, s. 1998), services rendered under contracts of services and job orders are not considered government services; and contracts do not have to be submitted to the CSC for approval; the employees involved in the contract or job orders do not enjoy the benefits enjoyed by government employees such as PERA, COLA and RATA; no employer-employee relationship exists; and they are not covered by civil service law. (CSC Resolution No. 98-2895 dated November 10, 1998) As represented, the Accounting Division has subjected the income payment to 3% percentage tax and 10% expanded withholding tax. From the foregoing, it is clear that the performance of services by the job-order personnel to the BIR is not under an "employer-employee relationship", hence, it is a sale of service which may be construed under Section 108 of the 1997 Tax Code, as amended, to wit: cHAaEC "Section 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. (i) . . . (ii) . . . The phrase "sale of or exchange of services" means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; . . ." The annual gross receipts of the subject personnel, however, may not exceed P1,500,000.00 which exempts them from value-added tax under Section 109 (1) (V) but subjects them to the 3% percentage tax under Section 116 of the same Tax Code, as follows: "SEC. 109. Exempt Transactions. (1) Subject to the provisions of subsection (2) hereof, the following transactions shall be exempt from the value-added tax: xxx xxx xxx (V) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of One million five hundred thousand pesos (P1,500,000). Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics Office (NSO)" "Section 116. Tax on Persons Exempt from Value-Added Tax. Any person whose sales or receipts are exempt under Section 109 (1)(V) of this Code from the payment of value-added tax and who is not a VAT-registered person shall pay tax equivalent to three percent (3%) of his gross quarterly sales or receipts: . . ." Thus, the remuneration to be received by the job-order personnel shall be subject to a percentage tax equivalent to three percent (3%) of his gross quarterly sales or receipts. As to withholding tax, Section 5.116 of Revenue Regulations (Rev. Regs.) No. 2-98, as amended, requires the withholding of percentage tax and states that: "Sec. 5.116. Withholding of Percentage Tax. Bureaus, offices and instrumentalities of the government, including government-owned or controlled corporations as well as their subsidiaries, provinces, cities and municipalities making any money payment to private individuals, corporations, partnerships and/or associations are required to deduct and withhold the percentage taxes due from the payees on account of such money payments. EICScD (A) Internal revenue taxes required to be withheld. Percentage taxes on gross money payments to the following shall be subjected to withholding at the rates herein prescribed: (1) Persons Exempt from Value-Added Tax (VAT). On gross payments to persons who are exempt under 109(z) [now Sec. 109(1)(V)] of the Code from payment of value added tax and who is not a VAT registered person except payment to cooperatives. three percent (3%). xxx xxx xxx" It appears that the 10% EWT being withheld from the job-order personnel is pursuant to Section 2.57.2 of Rev. Regs. 2-98, as amended, where it is provided that: "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 : (A) Professional fees, talent fees, etc., for services rendered by individuals On the gross professional, promotional and talent fees or any other form of remuneration for the services of the following individuals Fifteen percent (15%), if the gross income for the current year exceeds P720,000; and Ten percent (10%), if otherwise;" (underscoring supplied) After a perusal of the enumerated individuals subject to withholding tax following the aforestated provision, there is no instance found to be applicable for the job-order personnel. It is to be considered that the services to be performed by said personnel, under the contract, is practically clerical work such as updating records, encoding, and filing reports which cannot be qualified as a practice of profession or calling for which a professional, promotional or talent fee is paid as referred to in the foregoing provision. Furthermore, Section 2.57.2 (N) of Rev. Regs. 2-98, as amended, does not likewise apply. Said provision states "(N) Income payments made by the government to its local/resident supplier of goods and local/resident supplier of services other than those covered by other rates of withholding tax Income payments, except any single purchase which is P10,000 and below, which are made by a government office, national or local, including barangays, or their attached agencies or bodies, and government-owned or -controlled corporations, on their purchases of goods and purchases of services from local/resident suppliers EIASDT Supplier of goods One percent (1%) Supplier of services Two percent (2%) xxx xxx xxx" The provision covers withholding tax on income payments made by the government to its local/resident supplier of services. The term "local/resident supplier" is defined under the context of Sec. 2.57.2 (M), where it pertains to a supplier from whom any of the top twenty thousand (20,000) private corporations, as determined by the Commissioner, regularly makes its purchase of goods. The term "regular suppliers" refers to suppliers who are engaged in business or exercise of profession/calling with whom the taxpayer-buyer has transacted at least six (6) transactions, regardless of amount per transaction, either in the previous year or current year. The same rules apply to local/resident supplier of services other than those covered by separate rates of withholding tax. Similarly, the term "local/resident supplier" as used in Sec. 2.57.2 (N), may refer to a supplier from whom the government regularly makes its purchase of goods and that the term "regular supplier" has the same meaning as in the preceding sub-section. Taking into account the nature of the contract and the kind of services to be performed by the job-order personnel, the same cannot be considered as "local/resident suppliers" as referred to in the abovecited provision. The said personnel cannot be deemed to be "regular suppliers" because the transaction between them and the government is only in this instance as it was pursuance to E.O. 782 and which contract for service is only for the period of September 1 until December 31 of this year. Therefore, based on the foregoing, the job-order personnel shall be subject to a percentage tax at three percent (3%) of his gross quarterly sales or receipts pursuant to Section 116 of the 1997 Tax Code, as amended, and the BIR shall withhold 3% on the gross payment to said personnel pursuant to Section 5.116 of Rev. Regs. No. 2-98, as amended. 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.) JOEL L. TAN-TORRES Commissioner of Internal Revenue