VAT Ruling No. 052-01

August 6, 2001 VAT RULING NO. 052-01 109 (o), 108 (A) VAT 60-97 140-98 Ponce Enrile Reyes & Manalastas Law Office 3rd Floor, Vernida IV Bldg., Salcedo Village 1227 Makati City Attention: Attys. Regulus E . Cabote and Emelyn W . Corpus-Martinez Gentlemen : This refers to your letter dated January 10, 2000 requesting, in behalf of your client, DUTY FREE PHILIPPINES SERVICES, INC. (DFPSI) , for a ruling that the services rendered by the employees of DFPSI is exempt from VAT under Section 109(0) of the National Internal Revenue Code of 1997. As per documents submitted and per your representation, the Philippine Tourism Authority (Duty Free Philippines Division), hereinafter referred to as " PTA (DFP) ", entered into a Contract for Professional Services with the Employment Consultant of the Philippines, Inc., hereinafter referred to as the " ECPI " on June 30, 1998 under the following salient terms and conditions: that ECPI shall provide to PTA (DFP) qualified personnel to staff the DFP stores and other facilities; that ECPI agrees and covenants itself to HIRE and EMPLOY and second to PTA (DFP) all employees in its plantilla as of June 30, 1988, below the rank of Deputy General Manager and excluding all Consultants; that PTA (DFP) retains full control and management of its operations and has merely contracted ECPI to provide its manpower requirement; that PTA (DFP) Management shall approve all selections of personnel, promotions, employees transfers, disciplinary actions, merit increases, hiring and termination of personnel; that, however, ECPI shall have the right to provide its employees bonuses directly out of its net income without PTA (DFP)'s approval; that ECPI shall, however, provide the employees uniforms, shuttle services, training, salaries, bonuses, employee benefits and insurance and that PTA (DFP) shall have no direct liability to ECPI employees regarding the matters of salaries and the like; that ECPI agrees to PTA entirely that these staff are not employees of PTA (DFP) and that it shall indemnify and or reimburse PTA (DFP) should the latter be held liable for any claims, including damages, which may be filed by the employees against the latter in the future; that in consideration of the above-described manpower supply services, ECPI shall receive a basic fee equivalent to the monthly cost per head/level of employee in the plantilla, viz: Non-technical staff P4,051.50 Technical staff 4,855.52 Supervisory 7,393.41 Managerial 15,575.75 that said basic fee shall be payable to ECPI within 7 days from the end of each payroll period; and that over and above said basic fees, ECPI shall receive an overhead and administration cost of 15% . You also represented that ECPI was actually formed by the then contractual employees of PTA (DFP) for the sole purpose of rendering services exclusively to the latter. A few months from entering into the "Contract for Professional Services", these very same ECPI employees formed the DFPSI and the Contract was thus assigned to DFPSI with the approval of PTA (DFP). In 1996, however, the Duty Free Employees Association (DEA) filed a petition for certification election with the Department of Labor and Employment (DOLE) seeking recognition as the sole and exclusive bargaining agent of PTA (DFP), not DFPSI; that the Secretary of the DOLE granted the petition for the reason that "DFP is clearly the employer" of the DFPSI employees; that an appeal was taken by DFP to the Supreme Court assailing the DOLE ruling; that in a Resolution dated December 7, 1998, the Supreme Court dismissed the appeal stating that no grave abuse of discretion was committed by the DOLE; that in the light of the DOLE and Supreme Court decisions, the DFPSI entered into an agreement with the DEA on February 10, 1999 whereby the latter was duly recognized as the sole bargaining agent of all the employees within the DFP. It is now your contention that because of the decision of the DOLE, as affirmed by the Supreme Court, " that DFP is clearly the employer of the DFPSI employees ," there exists therefore an employer-employee relationship between the DFPSI employees and DFP, such that DFPSI is merely an agent of DFP insofar as these employees are concerned and is just a mere conduit for the compensation or remuneration of said employees, hence, the services rendered by the subject employees should not be subject to VAT. In reply, we confirm the exemption of the employees from VAT as service providers pursuant to Section 109(0) of the Tax Code of 1997 which provides that services rendered by individuals pursuant to an employer-employee relationship shall be exempt from value-added tax. Thus, the salaries and other payments made to the subject employees by reason of the said employment are EXEMPT from VAT. It is on this score that the employees are not VAT-registered and that they do not bill value-added tax on the compensation they receive. The payor of these salaries is DFPSI and nowhere in the records can it be found that it was ever billed VAT by the employees. It should be emphasized, however, that there is also a contract entered into between DFPSI and PTA (DFP) for the supply of manpower by the former to the latter. For this, DFPSI, a VAT-registered person, is considered as seller of services within the contemplation of Section 105 and 108 of the Tax Code. Hence, the gross receipts derived by DFPSI from PTA (DFP) representing the contract price (the basic salary per employee plus the add-on 15% overhead and administration cost) shall be subject to the value-added tax as compensation for the services sold. It must be noted that the term "sale or exchange of services" broadly embraces the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, regardless of whether the performance thereof calls for the exercise or use of the physical or mental faculties. In fact, it means any transaction undertaken in the course of business in the Philippines for a valuable consideration whether actually or constructively received and which is not expressly exempt from VAT under the Code or special law or international agreement to which the Philippines is a signatory. The valuable consideration would be the amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advance payments actually or constructively received during the taxable quarter from another person. Accordingly, it is the opinion of this office that the income derived by the subject employees pursuant to an employer-employee relationship is exempt from value-added tax. However, the gross receipts derived by DFPSI for providing PTA (DFP) the qualified personnel to staff the latter's stores, warehouses, offices and other facilities shall be subject to VAT pursuant to Sec. 108(A), of the Tax Code of 1997. (VAT Ruling No. 60-97 dated September 30, 1997; VAT Ruling No. 140-98 dated September 29, 1998). This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that that facts are different, then this ruling shall be considered null and void. IcTCHD Very truly yours, (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group