Consequential Taxes Imposable Against Compensation of Workers Duly Hired Through Execution of a MOA

September 29, 1998 BIR RULING NO. 140-98 109 (o) 24 (A) (1) (a)-000-00-140-98 Kagawaran ng Kagalingang Panlipunan AT PAGPAPAUNLAD Batasan Pambansa Complex, Constitution Hills Quezon City Attention: Undersecretary Belinda C . Manahan Internal Affairs and Resource and Development Gentlemen : This refers to your letter dated June 9, 1998 reiterating your previous request for a ruling in your letter dated February 10, 1998 regarding the consequential taxes that may be imposed against compensation of the workers duly hired by you through execution of a Memorandum of Agreement (MOA). It is represented that the working agreement between the workers and the Department of Social Welfare and Development (DSWD) is duly covered by a MOA; that these workers are hired, supervised and terminated by the Department for certain projects which are usually limited in nature; that the nature of jobs of these workers varies from a project coordinator and evaluator, of the personnel including that of secretaries and clerks; that they receive limited benefit such as integration of 13 th month pay and cash gift to the basic salary and social security, details of which is presented below by way of illustration, viz: dctai " MOA of CIDSS Project Admin . Officer III Basic Salary P11,495.00 ACA/PERA 1,000.00 P12,495.00 Add: Additional benefit 13th month pay (11,495.00/12 mos.) 957.92 Cash gift (1,000/12 mos.) 83.33 Insurance 100.00 Gross monthly P13,636.25 ========= that the Civil Service Commission (CSC) does not, however, consider these workers as employees and therefore not entitled to any government benefit aside from those specified; that the Department of Labor and Employment (DOLE) however, opined that these workers hired by the DSWD falls within the context of the definition of "employee" provided for under the Labor Code; that on the hand, Mr. Renato L. Manalili, Regional Director, BIR Region No. 7, Quezon City, issued a guideline stating that these workers are considered persons engaged in business, i.e., sale of services and therefore subject to 6% VAT based on the gross compensation per month from these workers. In reply, please be informed that pursuant to Section 109(o) of the Tax Code of 1997 [then Section 103 of the Tax Code, as amended by R.A. Nos. 7716 and 8241, and implemented by Revenue Regulations Nos. 7-95 and 6-97, respectively] services rendered by individuals pursuant to an employer-employee relationship are exempt from value-added tax. llcd A perusal of the MOA revealed that the employees concerned are being hired to perform a specific task and DSWD exercises direct supervision over them. DSWD likewise pays the salaries of these employees/workers although the funding is not taken from the general appropriation of the government but rather is being charged from a specific project. Moreover, DSWD has the power to terminate the personnel involved. As opined by the DOLE, DSWD falls within the context of an employer as defined in Section 97(b) of the Labor Code with respect to the concerned workers thus "ARTI. 97. Definitions . ... "(b) " Employer " includes any person acting directly or indirectly in the interest of an employer in relation to an employee and shall include the Government and all its branches, subdivisions and instrumentalities, all government-owned or controlled corporations and institutions, as well as non-profit private institutions, or organization." Based on the above, the Government through the DSWD is the employer of the hired workers. Such being the case, the provisions of Section 4 of P.D. No. 442, as amended [otherwise known as the "Labor Code of the Philippines"], in relation to Article 1702 of R.A. 386 [the Civil Code of the Philippines"],stating that " all doubts in the implementation and interpretation of all labor legislation and labor contracts shall be resolved in favor of the labor ",must be applied in the instant case. The position of the Civil Service Commission (CSC) excluding the hired personnel-workers as employees of the government on the mere reason that salaries of these personnel are being charged against the Maintenance and Other Operating Expenses (MOOE) and their hiring were not submitted to the CSC for approval, will not hold water in this case. Contrary to the CSC's opinion, the payment of salaries/wages and the power of selection and engagement of an employee being exercised by the employer are not the most important factors in considering whether an employer-employee relationship exists. Thus. the method of compensation does not define the essence of the relationship. (Dy Keh Beng v. International Labor and Marine Union of the Philippines, et al., G.R. No. L-32245 May 25, 1979). Moreover. it was held in various Supreme Court decisions that the most important index of the existence of the relationship is the so-called "control test". (Investment Planning Corporation of the Philippines v. Social Security System, G.R. No. L-19124, November 18, 1967). As pointed out by DSWD, it duly exercised control and supervision over these personnel. In the light of the foregoing, this Office hereby holds that salaries of hired personnel-workers are exempt from value-added tax (VAT). However, their compensation income are subject to the regular income tax imposed under Section 24(A)(1)(a) of the Tax Code of 1997, and consequently to the withholding taxes. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue