Correct Rate of Withholding Tax

September 16, 1988 BIR RULING NO. 457-88 50 (b) 203-82 457-88 Gentlemen : This refers to your letter dated June 9, 1988 requesting a ruling relative to the correct rate of withholding tax at source of which you are subject. It is represented that you are a local labor contractor; that you provide temporary or contractual personnel services to your clients; that you fill-in temporary staff vacancies in your clients organization such as the service of an accountant, secretary, clerk-typist, computer-programmer, data encoder, messenger, janitor, engineer, researcher, artist, etc., under terms and conditions agreed upon between you and your client; that in your contract with your client it is expressly stated that: "a) FSS, Inc. will provide the services of staffers who are technically qualified to perform the requirements of the job(s) contracted for by the client; "b) the contract of services between FSS, Inc. and the client is for a specific period of time ranging from one (1) week to six months; "c) the staffers remain the employees to FSS, Inc. and their wages as prescribed by laws as well as other duties, responsibilities, and obligations imposed by the New Labor Code are the full responsibility of FSS, Inc.; and "d) for services FSS, Inc. bills the client on a bi-monthly basis at the rate agreed upon. and that one of your clients, Jardine Davies, Inc., is subjecting your billings to the 5% withholding tax at source alleging that your activity is that of an employment agency which for tax purposes, is considered as a "business agent" under then Section 187(v) of the Tax Code, hence, the 5% withholding tax deduction under Section 1(a)(7) in relation to Section 1(b) of Revenue Regulations No. 6-85, as amended. In reply, please be informed that income payments to a labor recruiting agency are subject to the 1% expanded withholding tax. (Sec. 1(e)(2)(k), Revenue Regulations No. 6-85) Under the foregoing facts, you are neither a labor recruiting agency nor an employment agency but a service or labor contractor because, through your staff, you provide service to your clients. Under Revenue Regulations No. 13-78, as amended by Revenue Regulations Nos. 6-79 and 6-85, implementing Section 50(b) [formerly Sec. 51(f)] of the Tax Code, payments only to persons enumerated therein are subject to the expanded withholding tax. Considering that payments to a service or labor contractor, are not among those specified in said regulations, the payments of your clients to you as such are not, therefore, subject to the expanded withholding tax. However, since the said staffers you provide your clients are your employees, the wages received by them form part of the remunerations for services rendered, subject to the withholding tax on wages prescribed by Section 21 in relation to Section 71 of the Tax Code as amended by Batas Pambansa Blg. 135 as amplified by Revenue Regulations No. 6-82 as amended. Moreover, since the aforesaid payments to you as a service company or local labor contractor are not subject to the expanded withholding tax, the payor, shall render an information return on such payments pursuant to Section 61 (formerly Section 71) of the Tax Code, as amended by Batas Pambansa Blg. 135 and as implemented by Section 21 of Revenue Regulations No. 1-82 dated March 18, 1982. Finally, since you provide temporary or contractual personnel services to your clients effective January 1, 1988, you are subject to the 10% value-added tax pursuant to Section 102 of the Tax Code, as amended by Executive Order No. 273 based on your gross receipts if the same amounts to at least P200,000.00 and you are VAT-registered. (BIR Ruling No. 146-88) Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner