VAT Ruling No. 049-99

April 27, 1999 VAT RULING NO. 049-99 109 (o) 4-27-99 049-99 Hycl Philippines, Inc . 426 Bulalakaw St., Mandaluyong City 1501 Metro Manila Attention: Ms . Braulia D . Maniquez Operations Manager Gentlemen : This refers to your letter dated April 22, 1998 requesting for effective VAT-zero rating on your purchase of services from RAB Phils., Inc. llcd It is represented that HYCL PHILIPPINES, INC. ("HYCL") is a BOI-registered company engaged in the manufacture of nylon bag such as, but not limited to CD cases, luggages and bags which is 100% exported abroad; that RAB GENERAL SERVICES & UTILITIES, INC. ("RAB") is an agency supplying factory workers to HYCL for the immediate manufacture of intended goods for export; that the bills for such services rendered by RAB includes VAT based on gross compensation (salary, SSS, Medicare, Pag-ibig & 13th month pay) and the corresponding mark-up on gross compensation; that you contended that VAT should be based only on the mark-up and should not include worker's compensation; that you further contended that as a BOI-registered enterprise engaged in 100% export, the VAT being passed on to you for such supply of services should be at zero percent (0%) just like that of the supplier of raw materials; that the services rendered by the workers are the actual direct labor inputted in the manufacture of the export goods, which cost (compensation) are paid by HYCL through RAB; that the total wages received by the workers are computed as follows: Basic pay P. . . 13th month pay (Basic Daily/12) . . . 5 Days Incentive Leave (Basic Daily x 5/304) . . . Legal Holiday Pay (Basic daily x 10/304) . . . Employer's share: SSS (P177.50 x 12/304) for category A-C . . . (P152.00 x 12/304) for category D-G . . . Medicare (P25.00 x 12/304) . . . ECC (P10.00 x 12/304) . . . Total Direct Cost P. . . ====== that RAB bills HYCL based on the Total Daily Rate/Personnel plus a certain percentage for administrative overhead and other operational costs plus mark up; that ninety five percent (95%) of the workers are employed in the company for more than five (5) years now; that pursuant to the agency agreement between HYCL and RAB, the former has the discretion to recommend the retention or dismissal of the workers; and that while RAB provides the uniform and identification cards of the workers, it is HYCL that has a direct control and supervision on the employees/workers concerned. cdll 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 RA. Nos. 7716 and 8241 and implemented by Revenue Regulations Nos. 7-95 and 6-97, respectively) services rendered by individuals under an employer-employee relationship are exempt from value-added-tax.. Based on the representation made, RAB supplies manpower to HYCL for which the latter pays the workers' daily wage which includes the employer's share in the SSS, Medicare and ECC, as well as certain administrative overhead and other operational costs plus mark up. The said employer's contributions are thereafter presumed remitted by RAB to the concerned government institution/agency, and. the administrative and operational costs plus mark up are retained by it. Categorically, under Sec. 6, Rule VIII, Book III, Implementing Rules and Regulations, implementing Article 106 of the Labor Code, which provides that "Sec. 9. Labor-only contracting . (a) Any person who undertakes to supply workers to an employer shall be deemed to be engaged in labor-only contracting where such person: "(1) Does not have substantial capital or investment in the form of tools, equipment, machineries work premises and other materials; and "(2) 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. (b) Labor-only contracting herein is hereby prohibited and the person acting as contractor shall be considered merely as an agent or intermediary of the employer who shall be responsible to the workers in the same manner and extent as if the latter were directly employed by him . (Emphasis supplied) the employees-factory workers supplied by the "labor-only" contractor, i.e., RAB, are employees of HYCL. This is because where "labor-only" contracting exists the statute itself implies or establishes an employer-employee relationship between the employer (the owner of the project) and the employees of the "labor-only" contractor. (Phil Bank of Communications vs. NLRC et. al., G.R. No. L-66598, December 19, 1986). The existence of an employer-employee relationship is a question of law and being such, it cannot be made the subject of agreement. (Tabas et. al. vs. California Mfg. Corp, Inc. et. al., GR No. 80680, January 26, 1989) For purposes of VAT, therefore, the compensation received by the factory workers from such employment are not considered income from sale of service by one who is engaged in trade or business. Such being the case, the salaries or wages of the personnel and factory workers who were hired by HYCL through RAB are exempt from value-added tax (VAT) pursuant to Section 109(o) of the Tax Code of 1997. However, the same are subject to the regular income tax imposed under Section 24(A)(1)(a) of the same Tax Code, consequently to the withholding taxes. (BIR Ruling No. 140-98 dated September 29, 1998) On the other hand, the charges constituting administrative overhead and operational costs plus mark up being billed by "labor only" contractor RAB, are gross receipts from sale of services subject to VAT. The VAT component therefore of the sale of service must be based on these items mentioned, the same being identifiable and separable from the workers' compensation. The VAT for the service income (categorically, the agency fee) may be passed on by the seller-agent, RAB, to HYCL as part of the cost of service. As regards your request for effective zero-rating on the services rendered by the factory workers whose labor is directly inputted and forms part of the cost of the goods manufactured and exported, the same is hereby denied considering that compensation thus received are not subject to VAT. With respect to effective zero-rating of the VAT being passed on by the "labor-only" contractor, the same is likewise denied for lack of legal basis. Section 108(B) of the Tax Code of 1997 specifically enumerates the transactions subject to zero percent (0%) rate, thus; prcd "(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); "(2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); "(3) Services rendered to persons or entities whose exemptions under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate; "(4) Services rendered to vessels engaged exclusively in international shipping; and LexLib "(5) Services performed by subcontractors and/or contractors in processing, converting or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production. The service rendered by RAB as a "labor only" contractor does not fall under Subparagraph Nos. 1 and 2. Neither it falls under Subparagraph No. 5. Consistent with the above, the service rendered by the "labor only" contractor RAB cannot be readily identified in the finished product exported. ( The Cost Structures Schedule submitted by HYCL, disclosed the daily rate per personnel consisting of: 1) Total Direct Cost; and 2) Administrative Overhead/Other Operational Costs and Mark Up . Item No . 1 is basically the salaries or wages of the employees and Item No . 2 is what the "labor only" contractor RAB charges the HYCL .). The same, however, is considered as expenses necessary and ordinary to the trade or business of the company. Likewise, the BOI-registration of HYCL does not automatically make it fall within the purview of "VAT exempt entities under special law" as to effectively subject the supply of such services to zero percent (0%) VAT rate under Subparagraph No. 3. Such being the case, the "labor only" contractor RAB may pass on to the buyer of the service, i.e., HYCL, the VAT as part of the cost of the service rendered. 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