Withholding Tax of Government on Job Order Personnel under EO No. 782

By: Garry S. Pagaspas

Under Executive Order No. 782 series of 2009 (EO No. 782) entitled “Instituting Measures to Assist Workers Affected by Global Financial Crisis and Temporary Filling Up of Vacant Positions in the Government”, all departments and agencies of the government are authorized to set-aside 1.5% of their Maintenance and Other Operating Expenses (MOOE) for temporary hiring of qualified Department of Labor and Employment (DOLE) registered displaced workers and their dependents on a job order basis. As I browse the internet, tax compliance of job order basis personnel had been a common topic for discussion both by the personnel involved and the government agency employee in charge for withholding. Accordingly, this article is an attempt to reach them out and guide them on their tax compliance, though; this is neither equivalent to an expert opinion, nor, a formal ruling on the matter. The author strongly suggest that the job order personnel, agency employees and others concerned secure formal confirmation with the Bureau of Internal Revenue (BIR)

How are job order personnel classified, employee or contractor?

Under BIR Ruling No. 8-2010, it was ruled that the performance of services by job-order personnel, who, is a non-professional, hired pursuant to EO No. 782 is not under “employer-employee relationship in reference to DOLE-DBM Joint Circular No. 1-092 and CSC Memorandum Circular No. 38 series of 1993. Services of job-order personnel are construed as a sale of service under Section 108 of the 1997 Tax Code, as amended, imposing value added tax (VAT) on sale of services. Tax compliance of job order personnel would then follow this classification – construed as seller of service and not as employee.

Withholding tax on income payments of job order personnel Philippines?

Under Revenue Regulations No. 2-98, as amended, government agencies are required to withhold income taxes on income payments made to its local resident supplier of services as follows:

• 2 % for local resident suppliers of services under Section 2.57.2 (N); or,
• 10% for local resident professionals with gross income not exceeding P720k, or 15% if exceeding P720k under Section 2.57.2(A).

The above rates apply to job order personnel depending on their classification to non-professional or professional, and the level of current year gross income. To determine the level of income, Revenue Regulations 2-98, as amended, further requires filing an affidavit of declaration with the BIR to substantiate the application of the 10% or 15% on professional fees. The employer agency could do the same in behalf of the professional, if the service of the professional is exclusive to such government agency.

The government agency will remit to the BIR such amount withheld from the job order personnel within the time prescribed by the regulations for remittance (e.g. not later than the 10^th day following the end of applicable month using BIR Form No. 1601E). Likewise, the government agency will issue the job order personnel a proof of withholding tax, BIR Form No. 2307 (Certificate of Withholding Taxes Withheld) with filled-out on the upper portion of the form. Issuance could be made on a quarterly basis, or on every check payment to the job order personnel.

Withholding of 3% percentage tax or 5% value added tax of job order personnel Philippines?

Being a seller of service to the government agency, a job order personnel is liable for business tax as follows:

• 3% other percentage tax  (OPT) under Section 116 in relation to Section 109(1)(V), both of the Tax Code, as amended, if the annual gross receipts of the job order personnel would not exceed P1,919,500; otherwise;
• 12% value added tax (VAT) under Section 108, of the Tax Code as amended.

For a government agency payor, it is required to withhold the business tax as follows:

• 3% other percentage tax in the Philippines under Section 5.116(A)(1) of Revenue Regulations No. 2-98, as amended; or,
• 5% final withholding VAT in the Philippines under Section 4.114-2 of Revenue Regulations No. 16-2005, as amended.

Notably, the withholding of business tax is in addition to the withholding of income tax above for 2% or 10%/15%. As proof of withholding of business tax and remittance, the government agency will issue the job order employee BIR forms as follows:

• BIR Form No. 2307 with filled out portion at the bottom for 3% OPT withholding; or
• BIR Form No. 2306 for 5% final withholding VAT.

Substituted filing is allowed for 3% withholding tax of OPT, while 5% seems to be the final VAT liability for job order employees.

Summary

In sum, the rules on how the government agency will withhold the corresponding withholding tax has been provided as could be shown above through a combination of existing rules. What seems to be lacking is the rules on how the job order personnel would do its tax compliance specially on the following aspects:

• Whether or not they are required to register as a sole proprietor.
• Whether or not they will still file percentage tax or VAT returns on a monthly and/or quarterly basis.
• Whether or not they are required to issue official receipts to the the government.
• Whether or not they will file quarterly income tax returns.
• Whether or not they will submit other reports by virtue of VAT liability.
• Whether or not they will attach an audited financial statements to their annual income tax return.

While there could be some rules that could be applicable to them from existing regulations, there seems to be no formal issuance specifically applicable to the job order personnel with respect to its tax compliance in the Philippines. The author hopes that the tax authority will soon issue some more guidelines and clarifications on the above for guidance and easy reference.

Garry is a Certified Public Accountant (CPA) and a law degree holder in tax practice for about ten (10) years now helping out taxpayers on tax compliance, tax savings, tax assessments, tax refunds, financial statements audit, and other related professional accounting services. He is presently a frequent speaker of Tax and Accounting Center, Inc. and you may send him mail at garry.pagaspas(@)taxacctgcenter.org.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may also please send mail at info(@)taxacctgcenter.org, or you may post a question at Tax and Accounting Center Forum and participate therein.

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By: Garry S. Pagaspas

Once again, the Bureau of Internal Revenue (BIR) has been under fire lately with the issuance of the  Revenue Memorandum Order No. 20-2013 (RMO 20-2013) dated July 22, 2013 entitled “Prescribing the Policies and Guidelines in the Issuance of Tax Exemption Rulings to Qualified Non-Stock, Non-profit Corporations and Associations under Section 30 of the National Internal Revenue Code of 1997, as amended”.

Let us try to discuss the features of this new Revenue Memorandum Order No. 20-2013 (RMO 20-2013) and see for ourselves the new rules for BIR tax exemption of non-stock, non-profit corporations in the Philippines.

Only qualified corporations or associations will be exempted 

Under RMO 20-2013, only corporations or corporations that are duly qualified under Section 30 of the tax Code, as amended, shall be issued Tax Exemption Rulings. Corporations or associations which apply for tax exemption ruling under Section 30(E) of the Tax Code, as amended, must meet the following:

1. It must be a non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for rehabilitation of veterans.
2.  Must meet organizational test which means that it should limit its purposes to one or more described in Section 30(E) of the Tax Code, as amended.
3. Must meet operational test which mandates that regular activities of the corporation be exclusively devoted to accomplishment for its purpose, otherwise, it should be considered as “activities conducted for profit” and thus, taxable
4. All the net income or assets of the corporation or association must be devoted to its purpose/s and no part of its net income or asset accrues to or benefits any member or specific person.
5. It must not be a branch of a foreign non-stock, non-profit corporation.

Non-stock and non-profit corporation or association claiming exemptions under Section 30 of the Tax Code, as amended, but is not qualified will be subjected to regular income taxes. This however, may not apply to corporations claiming tax exemptions under special laws or under other provisions of the Tax Code, as amended, other than Section 30 thereof.

Validity of Tax Exemption Ruling

Under RMO 20-2013, a Tax Exemption Ruling in the Philippines shall be valid for three (3) years from date specified in the Ruling, unless, sooner revoked or cancelled. It shall be deemed revoked if there are material changes in the character, purpose, or method of operation of the corporation or association which are inconsistent with the basis for its income tax exemption.

Tax Exemption Ruling could be renewed upon filing an Application for Tax Exemption / Revalidation under the same requirements and procedures provided under RMO 20-2013. Upon approval, the same shall be valid for another three (3) years, unless sooner revoked or cancelled.

Status of Tax Exemptions issued prior to June 30, 2012

Under RMO 20-2013, tax exemption rulings or certificates issued to corporations or associations listed under Section 30 of the Tax Code, as amended, shall be valid as follows:

• Issued prior to June 30, 2012 shall be valid until December 31, 2013. 
• Issued July 1, 2012 or onwards shall be valid for a period of three (3) years from the date of issuance, unless sooner revoked or cancelled.

For those who would fail to file an application for revalidation on December 31, 2013, RR 20-2013 implies that they have lost their income tax exemption.

Processing of Certificate of Tax Exemption

Applications for tax exemptions are required to be filed with the BIR Revenue District Office (RDO) of  registration along with the required documentary requirements for securing BIR Tax Exemption of non-stock, non-profit corporations or associations in the Philippines. After pre-evaluation and findings of the RDO on the qualifications, the RDO shall prepare a recommendation stating the factual and legal bases, and endorse the same to the Office of the Regional Director.

Upon concurrence of the Regional Director, it will forward the docket to the Office of the Assistant Commissioner, Legal Service, Attention: Law Division who shall further review and evaluate the documents submitted. Upon finding in order, the Law Division shall prepare the Tax Exemption Ruling for approval and signature of the Commissioner of Internal Revenue or duly authorized representative.

At the pre-evaluation under RDO level, the applicant may file an appeal to the Regional Director within thirty (30) days from receipt of the RDO denial stating the factual and legal basis for denial.

Documentary requirements

RMO 20-2013 provides specific list of requirements for securing BIR Tax Exemption rulings and certificates. The various requirements are directed to further evaluate the qualifications of the applicant non-stock, non-profit corporation or association. It is not an all inclusive list and BIR may further require additional documentary requirements, if it deem necessary.

Summary

In sum, the BIR is now quite meticulous with the provision of BIR Tax Exemption in seeing to it that only those qualified under a particular provision of law could enjoy the benefits of income tax exemption. The mere fact that a corporation is registered as a non-stock and non-profit is not conclusive as to its income tax exemption as it has to duly establish the fact and the legal basis on its claim for exemption. Failure to do so would mean disqualification, and thus, being subject to income tax.

While RMO 20-2013 has a pending case now for the determination of its validity, we suggest that non-stock and non-profit still pursue with the application to avoid being subjected to tax on its non-profit operations.

Garry is a Certified Public Accountant (CPA) and a law degree holder in tax practice for about ten (10) years now helping out taxpayers on tax compliance, tax savings, tax assessments, tax refunds, financial statements audit, and other related professional accounting services. He is presently a frequent speaker of Tax and Accounting Center, Inc. and you may send him mail at garry.pagaspas(@)taxacctgcenter.org.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may also please send mail at info(@)taxacctgcenter.org, or you may post a question at Tax and Accounting Center Forum and participate therein.

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See our quality seminars, workshops, and trainings…

See our in-house tax and accounting seminars…

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