VAT Ruling No. 005-02

March 4, 2002 VAT RULING NO. 005-02 VAT Ruling No. 001-2001 Mr. Neil S. Queyquep Certified Public Accountant No. 30 Sanchez St. Parang Marikina City S i r : This refers to your letter dated April 23, 2001 requesting, in effect, for a ruling regarding the basis in computing the income tax and VAT liabilities of security agency, in the light of Memorandum Circular No. 1, Series of 1999 of the Philippine Association of Detective and Protective Agency Operators, Inc. (PADPAO) which circularized Wage Order No. NCR-07 and Wage Order No. NCR-08, showing the cost distribution per month of the salary of a Security Guard. In reply, there is quoted hereunder the pertinent portion of VAT Ruling No. 001-2001 showing the basis in computing the income and VAT liabilities of security agencies, viz: ". . ., please be informed that the income tax and value-added tax liabilities of a security agency are computed taking into consideration the contract price which, when realized becomes the gross receipts. Security agencies, whether in the form of a sole proprietorship or in corporate form, are subject to the income tax rates based upon taxable income as provided for in Section 24(A) and 27(A) of the Tax Code, respectively, or in the case of a corporation, to the minimum corporate income tax (MCIT) pursuant to Section 27(E) of the same code, as the case may be. Taxable income is arrived at by deducting the allowable deductions under Section 34 from total income/receipts while gross income for purposes of the MCIT is arrived at by deducting cost of services rendered from total or gross receipts. In either case, the computation of the taxable base starts with the contract price. "For VAT purposes, it is pertinent to cite VAT Ruling No. 046-91 wherein it was illustrated that in a monthly service fee received from clients on a per security guard basis of P4,885.00, which is distributed or disbursed of as follows: Monthly salary and allowances of the security guard P3,959.56 Monthly contribution (employer's share) to SSS; Medicare and state insurance 174.50 Agency's administrative overhead and profit margin, Inclusive of VAT 750.54 TOTAL P4,885.00 ====== it was held that an agency engaged in the business of selling guard services is subject to the 10% VAT based on its quarterly gross receipts. The term "gross receipts" means the total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged for materials supplied with the services and deposits or advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value added tax. Thus, since the aforesaid total amount of P4,885.00 already includes the 10% VAT, your taxable gross receipts should be computed by excluding the 10% VAT forming part of the said amount (Viz., P4,885.) less 1/11th of P4,885.00 = P4,441). Clearly, also, VAT is based on the contract price. "Accordingly, the basis in computing the income tax and VAT liabilities of security agencies shall be the gross receipts consisting not just of the agency's administrative overhead and profit margin but the entire amount received from their clients, net of the value added tax." The above example assumes that the amount of 10% VAT included in the amount of P750.54 is Computed on the basis of the gross fee invoiced to the client, and not on the overhead and profit margin only. This being the case, to illustrate, the above example, therefore, the tax base for the 10% VAT is P4,885.00, the VAT being 1/11 of such amount, or P444.09. On the other hand, the gross income for purposes of computing the income tax liability is 10/11 of P4,885.00, or P4,440.90. We hope that your question is fully answered. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group