BIR Ruling No. 008-10

June 3, 2010 BIR RULING NO. 008-10 Sec. 24 (A); RR 2-98; E.O. 782 Department of Health Building #1, San Lazaro Compound, Rizal Avenue, Sta. Cruz, Manila Attention: Atty. Ronald R. de Veyra, CEO IV Director III-Legal Service Mr. Laureano C. Cruz OIC-Financial and Management Service Gentlemen : This refers to your request for legal opinion on the applicable withholding tax rates for job-order contract employees. ITCcAD It is represented that the Department of Health (DOH) has employed contractual personnel ranging from professionals like doctors, nurses, pharmacists, certified public accountants, etc. and non-professionals like clerks, administrative officers, and etc.; that these contractual personnel are hired either as regular or on a job-order basis; that prior to calendar year 2009, salaries of these employees were treated as compensation thus, compensation income tax was used; that subsequently, upon verbal information from the BIR, compensation of newly hired contractual personnel could be subject to either ten percent (10%) expanded withholding tax or 3% percentage tax depending on the classification of employee as professional or non-professional; and that the DOH now seeks to be clarified on the applicable tax rates for said personnel. In reply, please be informed that personnel, professional or non-professional, employed on contractual or regular basis shall be subject to withholding tax on compensation as provided by the following sections of the Revenue Regulations (Rev. Regs.) 2-98, as amended, in relation to Section 24 (A) of the 1997 Tax Code, as amended: "SECTION 2.78. Withholding Tax on Compensation. The withholding of tax on compensation income is a method of collecting the income tax at source upon receipt of the income. It applies to all employed individuals whether citizens or aliens, deriving income from compensation for services rendered in the Philippines. The employer is constituted as the withholding agent. SECTION 2.78.1. Withholding of Income Tax on Compensation Income. (A) Compensation Income Defined. In general, the term "compensation" 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 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 fees, 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 benefits tax under Sec. 33 of the Code; taxable pensions and retirement pay; and other income of a similar nature constitute compensation income. The basis upon which the remuneration is paid is immaterial in determining whether the remuneration constitutes compensation. Thus, it may be paid on the basis of piece-work, or a percentage of profits; and may be paid hourly, daily, weekly, monthly or annually. SEHaTC 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. Rev. Regs. 2-98, as amended, also defines and distinguishes an "employee" from a professional who renders services for a fee, thus: "SECTION 2.78.3. Employee. The term "employee" is an individual performing services under an employer-employee relationship. The term covers all employees, including officers and employees, whether elected or appointed, of the Government of the Philippines, or any political subdivision thereof or any agency or instrumentality. In general, the relationship of the employer and employee exists when the person for whom services were performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which the result is accomplished. An employee is subject to the will and control of the employer not only as to what shall be done, but how it shall be done. In this connection, it is not necessary that the employer actually directs or controls the manner in which the services are performed. It is sufficient that he has the right to do so. The right to dismiss an employee is also an important factor indicating that the person possessing that right is an employer. Other factors or characteristics of an employer, which may not be necessarily present in every case, are furnishing the tools and furnishing of a place to work, to the individual who performs the services. In general, an individual is not considered an employee if he is subject to the control or direction of another merely on to the result to be accomplished by the work, and not on to the means and methods for accomplishing the result. In general, individuals who follow an independent trade, business, or profession, in which they offer their services to the public, are not employees. The measurement, method or designation of compensation is also immaterial if the relationship of employer and employee in fact exists. No distinction is made between classes or grades of employees. Thus superintendents, managers, and others belonging to similar levels are employees. An officer of a corporation is an employee of the corporation. An individual, performing services for a corporation, both as an officer and director, is an employee subject to withholding on compensation, including director's fees." (Emphasis supplied) TIAEac For professionals who are paid for the services they render, they are subject to a withholding tax rate of 10% on the gross professional fee, as follows: "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 Ten percent (10%); (1) Those individually engaged in the practice of professions or callings: lawyers; certified public accountants; doctors of medicine; architects; civil, electrical, chemical, mechanical, structural, industrial, mining, sanitary, metallurgical and geodetic engineers; marine surveyors; doctors of veterinary science; dentist; professional appraisers; connoisseurs of tobacco; actuaries; and interior decorators; (2) . . ." In view of Executive Order (E.O.) 782 dated February 10, 2009 ("Instituting Measures to Assist Workers Affected by the Global Financial Crisis and Temporary Filling Up of Vacant Positions in the Government") and as implemented by DOLE-DBM Joint Circular No. 01-09 dated March 23, 2009, 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 "but not to go beyond one month after the approval of the agency's Rationalization Plan or December 31, 2009, whichever comes earlier . . .". 1 The DOLE-DBM Joint Circular No. 01-09 2 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." (Emphasis supplied) EHCDSI 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) From the foregoing, it is clear that the performance of services by the job-order personnel, who is a non-professional, hired pursuant to EO 782 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: "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; xxx xxx xxx" 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: caSDCA "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 which is equivalent to the salary of the position and 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 the applicable withholding tax rate, 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. (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: TIcEDC (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" Remuneration of professionals hired under EO 782 shall be subject to 15% or 10% expanded withholding tax pursuant to Section 2.57.2 (A) of Rev. Regs. 2-98, as amended, (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 perusal of the enumerated individuals subject to withholding tax following the aforestated provision, there is no instance found to be applicable for non-professionals that are hired as job-order personnel. It is to be considered that the services to be performed by clerks and administrative officers cannot qualify 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 AEDcIH 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 and the kind of services to be performed by the job-order personnel under their contract, 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, 2009. Therefore, based on the foregoing, compensation of professionals and non-professionals hired as regular or contractual employees of the DOH are subject to the graduated rates of withholding tax on compensation under Section 2.78 of Rev. Regs. 2-98, as amended; remunerations of or income payments to professionals hired under job-order basis pursuant to EO 782 shall be subject to 10% creditable withholding tax under Section 2.57.2 of Rev. Regs. 2-98; and non-professionals hired under job-order basis pursuant to EO 782 shall be subject to a percentage tax at three percent (3%) of their 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. ITaCEc 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 Footnotes 1. DBM Circular No. 2009-9 dated June 19, 2009. 2. Implementing Guidelines of Executive Order No. 782.