REVENUE MOMERANDUM CIRCULAR NO.39 - 2007SUBJECT : Clarifying theIncome TaxandVAT Treatmentof Agency Fees/Gross Receipts ofSecurity AgenciesIncluding theWithholdingof Taxes Due thereon.
1. BACKGROUNDForincome tax purposes,all sellers of services, as well assellers of goods or properties, may adopteitherthecash basisoraccrual basisas their accounting method for reporting income. This means that the timing of the imposition of the tax depends on the accounting method employed by the taxpayer.
However, forVAT purposes, seller of services, includingsecurity agencies, have to be taxed solely on acash basis– that is uponactualorconstructive receipt of the incomebecause the VAT on sale of services is specifically imposed by law on the taxpayer’sgross receipts.
But in order that an amount received will form part of gross receipts, the same must constitute the gross income of the taxpayer when received or earned. Hence,if something is received by a taxpayerbut theamount receiveddoes not orwill not form partof itsgross income(i.e., receipt of money constituting a loan or liability), the samecannot be partof itsgross receipts subject to VAT.
ISSUE:The issue that comes into fore iswhether or not the security guard’ssalaries, whichform part of the Contract Priceof thesecurity servicesrendered by the Security Agency, which will constitute aspart of the taxable gross receipts subject to VAT, whether actually or constructively received.
“PAST TENSE RULINGS” (1981, 1985, 2002)Inseveral rulings issued by the Bureau, it has been consistently maintained thatsalariesof thesecurity guardsformpartof the taxablegross receiptsof asecurity agency. As cited in BIR Ruling Nos. 69-02, 049-85 and 271-81, the reason for this is “that thesalariesof thesecurity guardsare actually theliability of the agencyand that theguardsare considered theiremployees; hence, forpercentage taxpurposes, thesalariesof thesecurity guardsareincludiblein itsgross receipts.”
However, technically speaking, thesalariesof thesecurity guardsare being paid for by theprincipalsorclientsof theSecurity Agency. UnderSection 6of RA No. 6727 (The Wage Rationalization Act)amendingPD No. 442 (The Labor Code of thePhils.), theliability of the security agenciesfor the prescribedincreasesin thewage rates of workersare explicitly required to beborne by the principalsorclientsof theservice contractors(e.g. Security Agency), with thelatter(Security Agency) being madejointly and severally liablefor the same, but only in the event that theprincipalorclientfailstopay the prescribed wage rates, to wit:
Section 6. In the case of contractors for construction projects and for security, janitorial, and similar services, the prescribed increase in the wage rates of the workers shall be borne by the principals or clients of the construction/service contractors and the contract shall be deemed amended accordingly. In the event, however, that the principal or client fails to pay the prescribed wage rates, the construction/service contractor shall be jointly and severally liable with its principal or client.”
Furthermore, under Section 1, Rule XIV of the 1994 Revised Rules and Regulations implementing RA No. 5487, as amended, which governs the “Organization and Operation of Private Security Agencies and Company Security Forces throughout the Philippines,” it is so provided that:
Section 1. Compensation. – No watchman, security guard or private detective shall be paid salary or compensation less than prescribed by existing laws, rules and regulations including those that may be promulgated relative thereto. The amount prescribed therein shall beearmarked and set asidefor the purpose aforestated; thus, the same shall thereafter besegregated from the monies received by the agency from its clients as an amount reserved for the remuneration of the guard or detective.
Clearly, theSecurity Agency has no controlor dominion over thatportion of the payment received from its Clientwhich is intended or earmarked assalaries of the security guards. TheSecurity Agency does not own the fundssuch thatit cannot use itfor any other purpose likepayment of rentals, utilities, taxes and other expenses.It is now settled that only receipts which is subject to a taxpayer’s unfettered command and which he is free to enjoy at his option is taxed to him as his income whether he sees fit to enjoy it or not. (Corliss v. Bowers, 281 U.S. 376)
In view of the clear language of the law and its implementing regulations placing the primary obligation on the Client to pay the salaries of the security guards coupled with the requirement that the monies received by the Security Agency representing salaries shall be earmarked and segregated for the said guards,the amount paid by the Client the salaries of the security guardswill notform part of the Security Agency’s gross income, and neither will it form part of its taxable gross receipts when actually or constructively received.This peculiarity obviously places the Security Agency on a tax situation different from other service providers.
INCOME TAX TREATMENTSecurity Agency (Vigilant Security)For Security Agency must record as part of itsgross incometheAgency Feeportionof the payment, net of the VAT thereon. Since the security guardssalariesare tacked in aspart of the service fees, the Security Agency must always recognize thatportion(salaries) of the fees as aLIABILITY.
For this purpose, theContract for Security Servicesentered into by and between the Security Agency and its Client must provide for a breakdown of the amount of security services into2 components: (1) theAgency Fee, and (2) theSecurity Guards’ salaries.
CAVEAT (BEWARE)IftheContractdoesnot providefor abreakdown of the amount payable(1) Agency Fee (2) Security Guards’ salaries, tothe Security Agency, theentire amountrepresenting theContract Pricewill be taxed asincometo the Agency, which mustform partof itsgross receipts, whether actually or constructively received.
Assume that Vigilant Security Agency, Inc. was contracted byTanzoJewelry Corp. to provide security services in the latter’s store. The contract price on a monthly basis is P18,000 broken down into: Security Guards salaries of P14,179.08 and Agency Fee of P3,411.54 and Output Tax of P409.38.Entry:Cash P17,931.77Prepaid Income Tax 68.23(2% X P3,411.54)(advanced income tax Form 2307)Service Income P3,411.54Output Tax 409.38Due to Security Guards (liability) 14,179.08
TheSecurity Agencywhich is thetrusteeof the funds segregated and earmarked assalariesof thesecurity guardsis thewithholding agentfor purposes of thewithholding tax on compensation income. Uponpaymentof the security guards’salaries, the Security Agency shall record the same as follows:Entry:Due to Security Guards (liability)P14,179.08Cash P12,637.11Withholding Tax Payable 1,541.97
Client of Security Agency(DMCI)Theclient(DMCI)who is engaged in business can claim as adeduction(EXPENSE)from gross incomethetotal amount paid to the Security Agency, net of the VAT on the Agency Fee. It is allowed to recognize anInput Taxbased on Agency Fee if the transaction is covered by aVAT O.R. issued by the Security Agency. It is also requiredto withholdand remit the Expanded Withholding Tax(EWT)on the Agency Fee. The portion of the expense pertaining to thesecurity guards’ salarieswill be covered by aNON-VAT Acknowledgment Receiptissued by the Security Agency(VIGILANT).
Entry of Client(DMCI): (To recognize Expense)Security Services-Agency FeeP3,411.54Security Services-Salaries of SG 14,179.08Input Tax (P3,411.54 X 12%) 409.38CashP17,931.77Withholding Tax Payable 68.23(2% X P3,411.54top 20,000 corp.)(DMCI is the withholding agent and shall issue the BIR Form 2307)
VAT TREATMENTSecurity Agency(VIGILANT)For VAT purposes, thetaxable gross receiptsof theSecurity Agencypertains to the amount actually or constructively received by it constituting its gross income. Since only the amount covering theAgency Feerepresents itsgross income, then thatportion aloneof theContract Price, when actually or constructively received, will constitute theSecurity Agency’s taxable gross receipts.
Security AgencyThis means that theamount receivedby theSecurityAgency(VIGILANT) which will be segregated, earmarked orset aside for thesalaries of the security guardswillnot form partof its gross receipts but should be recognized as aLIABILITY.Accordingly, the12% Output Taxwill be computed on theAgency Feeof theSecurity Agency(VIGILANT) which shall in turn theInput Taxof its client (DMCI).
Client (DMCI)Only theportion of the paymentof theAgency Feeif covered by aVAT O.R.will entitle theVAT registered client(DMCI) to a claim ofInputTaxcredit. This means that the amount ofoutput tax paid by the Security Agency(Vigilant) is theamount of input tax available to the client(DMCI).The client (DMCI)cannot claimanInput Taxon thesalary portionof the expense (Security Services Expense-Salary of SG) because it pertains toservices exempt from VATunderSection 109(I)of the Tax Code(employer-employee relationship)
Receipts issued for the entire contract pricePursuant toSection 113(invoicing and accounting requirement of a VAT registered TP) of the NIRC as implemented byRR 16-2005, as amended, theSecurity Agency(Vigilant) shall issue aVAT O.R.for every sale, barter or exchange of services. TheVAT O.R.shall cover theentire amountwhich the client(DMCI)pays to the Security Agency(Vigilant)representing the compensation of its services,Agency Fee, plus VAT.
The Security Agency(Vigilant)shall issue aNON-VAT Acknowledgment Receiptto the client(DMCI)representing thesalariesof the Security Guards.Anotarized certification of the EWTshall be asufficient substantiationfor theexpensethat will be claimed as a deduction from gross income of the client(DMCI).
WITHHOLDING TAX COMPLIANCE“Allincome paymentswhich are required to be subjected to withholding tax of income tax shall be subject to the correspondingwithholding tax rateto be withheld by the person having control over the payment and who, at the same time,claims the expenses.” (Revenue Regulations No. 2-98, asamendedbyRR 30-03.)
Theclient(DMCI) is constituted as thewithholding agent of the EWT. However, theportionof theContract Pricerepresenting thesalariesof the Security Guards, theSecurity Agency(Vigilant) shall be theone responsiblefor thewithholding tax on compensation. This is because while the client (DMCI) who claims the payment of the salary as anexpenseunder Section 34(K), it is theSecurity Agency(Vigilant)who physically controlsthepayment to the salariesof the Security Guard.
ANotarized Certificationmust be furnished by the Security Agency(Vigilant)to the client(DMCI)indicating thenames of the guardsemployed by the client (DMCI),their TINs, the amount ofsalariesandtax withheld.ThisNotarized Certificationtogether with theNON-VAT Acknowledgment Receiptmust be kept by the client(DMCI)assubstantiationfor the claim of theexpense.
The above requirement is without prejudice to the provisions ofRR 2-2006mandatorily requiringthe filing and submission of the MonthlyAlphalistof Payees(MAP)and SummaryAlphalistof Withholding Agents(SAWT).