Not gov’t employee after all

With the current administration capitalizing heavily on public spending mostly in infrastructure, rural development, and social services to drive growth of the country while catering to the Filipinos’ needs, the government relies on labor provided by its citizens to carry-out its reform goals and aspirations.

Previously introduced to address job security concerns which may arise due to the financial crisis and the impending rationalization of the government’s executive branch, the job-order basis or contract of service job arrangement has turned out to be one of the government’s reliable labor sources over the years.

Currently, it can be observed that many government departments, offices and agencies including Government Owned and Controlled Corporations (GOCC) and Government Financial Institutions (GFI) engage personnel through this type of job arrangement to render various services for the government.

Notwithstanding the regularity of this job arrangement, it appears that contractual parties still encounter the common predicament on taxability of the remunerations/payments for such transactions. In this regard, the Bureau of Internal Revenue (BIR) issued a Revenue Memorandum Circular (RMC) in December 2016 to clarify the proper taxation on the remunerations/payments to individuals hired under such job arrangements.

The BIR echoed the Civil Service Commission’s (CSC) requirement for the contractual parties to execute a contract of services, or memorandum of agreement, or job order, in accordance with the rules of the Commission on Audit prior to pursuance of the job arrangement. The BIR cited the existing guidelines of the CSC that it is imperative to establish that no “employer-employee relationship” is created when a person is performing work under a job order or hired under a contract for services with the government. Thus, the services provided to the public are not to be considered as government services.

The foregoing citations by the BIR demonstrate its intent to repeal the impression that remunerations earned/payments received under such type of job agreement is considered as compensation similar to that between an employer and an employee. Alternatively, the BIR implied such type of job arrangement may be compared to the income earned by independent individuals rendering either professional or non-professional services to the public, outside any contractual obligation arising from an employer-employee relationship between the government office and service-providing individuals.

Consequently, the legal bases cited by the BIR for the taxability of the professional fees derived through such job arrangement are the existing tax rules and regulations for individuals publicly exercising their professions. As such, the income earned by a professional for the services to the government shall be subject to creditable withholding tax (CWT), at a rate of 10 percent or 15 percent, whichever is applicable. It can be seen that the RMC impliedly took the opportunity to re-emphasize that the 10 percent CWT shall only be applied on remunerations/professional fees, if the professional’s annual income does not exceed P720,000 and if other documentary requirements prescribed are met. Otherwise, the professional fees shall be taxed at 15 percent.

On the other hand, remuneration paid to non-professionals like laborers and other contractors are not subject to CWT. This may seem to be contrary to the tax treatment for professional fees where similar to other domestic purchases, the income payments are subject to CWTs. Thus, it may be assumed the BIR’s intent for this tax treatment is to curtail any potential tax leakage from withholding in cases when job-orders are only on piecemeal or for intermittent jobs. It is worthy to note that withholding tax laws provide that government offices should withhold two percent on its purchase of services from suppliers whom the government had at least six transactions for either the previous or the current year, regardless of the amount per transaction or those who had single transaction with the government and the total amount is at least P10,000. Considering the piecemeal transactions may not qualify as regular suppliers, the remuneration shall instead be subject to income tax.

The RMC’s emphasis on non-establishment of “employer-employee relationship” under the job arrangement also shows BIR’s intent to qualify the transaction as a sale of service subject to the 12 percent VAT, for a qualified VAT taxpayer, or three percent percentage tax, if otherwise.

The Philippine VAT law provides that taxpayers whose total annual gross receipts, inclusive of income other than the professional and contractor’s fees, exceeds the P1,919,500 threshold shall qualify as VAT taxpayers. Additionally, non-institutional, individual professionals, or contractors should be reminded that the threshold for VAT qualification is not conjugal. Thus, the husband and the wife are considered as separate taxpayers whose gross receipts should be separately calculated for threshold calculation purposes.

Taxpayers should be cautious in monitoring the foregoing qualifications for the VAT threshold. Otherwise, taxpayers expose themselves to risks of BIR inquiries.

Meanwhile, the gross payments to job order personnel whose annual gross receipts do not exceed the P1,919,500 threshold are exempt from VAT, but shall be subject to withholding of percentage tax at three percent. Thus, the government office, agency, GOCC, GFI, province, city or municipality making the payment should deduct and withhold the percentage taxes due from the job-order contractors on account of such money payments.

The RMC may not have discussed the obligation of the government to withhold five percent VAT on its income payments to its contracting parties. However, the existing and effective VAT rules on sales to government provides that the government or any of its political subdivisions including GOCCs and GFI should deduct and withhold final VAT due at the rate of five percent of the total gross payment. Accordingly, taxpayers should be monitoring the input taxes attributable to such sale for determination of the remaining seven percent VAT, which shall effectively account for the standard input tax. In case of doubt on declaration of such sales to government, taxpayers may still refer to the existing Philippine VAT regulations.

With the expected increase in labor requirements from the government, taxation on previously assumed as “employer-employee” relationship woes would hopefully be settled by this issuance of the BIR. For the job-order personnel, yes – we confirm that you are not an employee after all.

Bon Cedrick Dela Cena Doroja is a supervisor from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice, Tier 1 transfer pricing practice and Tier 1 leading tax transactional firm in the Philippines by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email [email protected] [email protected].