Cessation of the Effectivity of RA 11469 Granting Tax and Duty Exemption to Importations under Section 4 (o) Thereof

July 3, 2007 BIR RULING [DA-357-07] Rev. Regulations No. 17-2003; DA-113-2003 S7S Manpower Contracting Services Unit 102 Precious Bldg., National Hi-way, Brgy. Dila City of Sta. Rosa, Laguna Attention: Ms. Lovella R. Laraya VP for Admin. & Gen. Affairs Gentlemen : This refers to your letter dated February 16, 2007 requesting for a confirmation of your opinion that since your clients are not among the top ten thousand (10,000) private corporations, the income payments made by your principals are not subject to the 2% Expanded Withholding Tax. It is represented that S7S Manpower Contracting Services was established on March 2005 as a single proprietorship; that its primary purpose is to engage, undertake in, or otherwise carry on the business of subcontracting of all types of work or services and the supply of manpower services, save for recruitment activities; that S7S receives income payments from its various principals for rendering subcontracting services; and that you opine that income payments made by your principals are not subject to the Expanded Withholding Tax in view of the fact that subcontracting of all types of work and services are not expressly provided for as long as your customers are not classified by the Commissioner of Internal Revenue as among the top ten thousand (10,000) corporations. In reply, please be informed that Section 3 (E) (3) (k) of Revenue Regulations No. 17-2003 dated March 31, 2003 amended further pertinent provisions of Revenue Regulations No. 2-98, as amended, providing for additional transactions subject to Creditable Withholding Tax, provides as follows: "SEC. 3. INCOME PAYMENTS SUBJECT TO CREDITABLE WITHHOLDING TAX. Sec. 2.57.2 of Revenue Regulations No. 2-98, as amended, is hereby amended as follows: Sec. 2.57.2 Income payments subject to creditable withholding tax and rates prescribed thereon. Except as herein otherwise provided, there shall be withheld a creditable withholding 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: aDHCAE xxx xxx xxx (E) Income payments to certain contractors On gross payments to the following contractors, whether individual or corporate Two percent (2%) xxx xxx xxx (k) Labor recruiting agencies and/or "labor-only contractors. For this purpose, any person who undertakes to supply workers to an employer shall be deemed to be engaged in "labor-only" contracting where such person does not have substantial capital or investment in the form of tools, equipment, machineries, work premises and other materials and the workers recruited and placed by such person are performing activities which are directly related to the principal business or operations of the employer in which the workers are habitually employed. " A reading of the above regulations disclosed that indeed, labor only contracting, is a form of service rendered that is subject to the 2% creditable withholding tax. Further, you opine that your transactions with your clients who are not classified as among the top 10,000 corporations should not be subject to withholding tax. We disagree. In short, the relevant provision is not Section (M) of Revenue Regulations No. 17-2003 which refers to income payments made by the top 10,000 corporations. Thus, it would be erroneous to conclude that since your clientele does not fall under the classification of top 10,000 corporations, the income payments made to you will not be subject to withholding taxes. IN VIEW OF THE FOREGOING, this Office hereby holds that payments made by the clientele-companies of S7S Manpower Contracting Services, are subject to a creditable withholding tax at the rate of 2% effective March 31, 2003, in accordance with Section (3) (E) (3) (k) of Revenue Regulations No. 17-2003. ADEHTS Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service