RMC No. 39-2007: Clarifies the Income Tax and VAT treatment of agency fees/gross receipts of Security Agencies including the withholding of taxes due thereon

Summary

RMC No. 39-2007 clarifies the Income Tax and VAT treatment of agency fees and gross receipts of security agencies, including the withholding of taxes on them.

Key points

1. Guards’ salaries are not income of the agency. The part of the Client’s payment representing security guards’ salaries is not part of the agency’s gross income or taxable gross receipts, and the agency records it as a liability. Only the Agency Fee, net of VAT, is gross income.
2. Contract must show a breakdown. The contract must split the price into the Agency Fee and the Security Guards’ Salaries. Without a breakdown, the entire Contract Price is taxed as income of the agency and forms part of its gross receipts.
3. VAT treatment. The 12% output tax is computed only on the Agency Fee, and it becomes the Client’s input tax if covered by a VAT Official Receipt. No input tax can be claimed on the salary portion because services under an employer-employee relationship are VAT exempt under Section 109(I) of the NIRC.
4. Receipts. The agency issues a VAT Official Receipt for the Agency Fee, with VAT shown as a separate item. The salary portion is covered by a Non-VAT Acknowledgement Receipt, which with the notarized EWT certification supports the Client’s deduction.
5. Withholding. The Client withholds and remits Expanded Withholding Tax (EWT) on the Agency Fee. The agency withholds tax on compensation on the guards’ salaries.
6. Certification to the Client. For deductibility under Section 34(K) in relation to Sections 58 and 81, the agency gives the Client a Notarized Certification listing the guards’ names, TINs, salaries and tax withheld. The Client keeps it on file with the Non-VAT Acknowledgment Receipt.

Who is affected

• Security agencies
• Clients of security agencies engaged in business

Deadlines and effectivity

• Notarized Certification: on or before January 31 of the year following the year of withholding

Summary by Tax Resources PH. It is not a substitute for the full text of the issuance or professional advice.