Transcript Slide 1

VAT TREATMENT OF THE
PAYMENT FOR SECURITY
SERVICES
(RMC 39-2007)
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I. BACKGROUND
INCOME TAX:
Cash basis or Accrual basis may be
adopted as accounting method for
reporting of income
The timing of the imposition of the tax
depends on the accounting method
employed.
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VALUE-ADDED TAX:
 Seller of Services, including
security agencies, have to be
taxed solely on the Cash
Basis.
 Cash Basis – upon actual or
constructive receipt of income
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VALUE-ADDED TAX:
Gross Receipts – must constitute
the gross income of the taxpayer
when received or earned.
If amount received does not form
part of gross income, the same
cannot be part of gross receipts
subject to VAT.
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Do the salaries of security guards form
part of the taxable gross receipts of a
security agency?
Prior to RMC 39-2007:
 Salaries of the security guards are actually
the liability of the agency, hence, includible in
its gross receipts for business tax purposes.
 BIR Ruling Nos. 69-02,049-85 and 271-81
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RMC 39-2007:
 Liability of the security agencies for the
prescribed increases in the wage rates
of workers are explicitly required to be
borne by the principal or clients of the
service contractor pursuant to Sec 6 of
RA 6727 (The Wage Rationalization
Act)
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RMC 39-2007:
 Sec 1, Rule XIV of the 1994 Revised
Rules and Regulations implementing
RA 5487 provided that the monies
received by the agency from its clients
as an amount reserved for the
remuneration of the guard or detective
must be segregated.
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RMC 39-2007:
 Security Agency has no control or
dominion over the portion of the
payment received from its client which is
intended or earmarked as salaries of the
guards.
 Only receipts which a taxpayer is free to
enjoy at his option is taxed to him as his
income. (Corliss v Bowers, 281 U.S.
376)
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II. INCOME TAX TREATMENT OF THE
PAYMENTS MADE TO SECURITY AGENCY:
1.
On the Part of the Security Agency:
 Agency Fee (amount net of VAT) – part of gross
income subject to income tax
 Security Guards’ Salaries – LIABILITY
 If the Contract does not provide for a
breakdown of the amount payable to the
Security Agency, the entire amount
representing the Contract Price will be taxed as
income to the Agency, which must form part of
its gross receipts.
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Illustration:
Assume that Vigilant Security Agency,
Inc. was contracted by Tanzo Jewelry
Corp., to provide security services to the
latter’s store. The contract price on a
monthly basis is P18,000.00 broken
down into: Security Guards’ Salaries of
P14,179.08 and Agency Fee of
P3,820.92 (inclusive of VAT)
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Journal Entries:
Debit: Cash
Prepaid Income Tax (2% EWT
on agency fee)
17,931.77
Credit: Service Income (agency fee)
Output Tax (on agency fee)
Due to Security Guards
68.23
3,411.54
409.38
14,179.08
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Journal Entries: Upon Payment of the
Security Guards’ Salaries:
Debit: Due to Security Guard
14,179.08
Credit: Cash
Withholding Tax Payable
12,617.11
1,541.97
The Security Agency who is the trustee of the
funds segregated and earmarked as salaries of
the security guards is the withholding agent for
purposes of the withholding tax on
compensation.
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2. On the Part of the Client or User of
Security Services:
Journal Entries:
Debit: Security Services-Agency Fee 3,411.54
Security Services-SG Salaries 14,179.08
Input Tax (only on Agency Fee)
409.38
Credit: Cash
WHT Payable(2% EWT on
agency fee)
17,931.77
68.23
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III. VAT TREATMENT OF THE PAYMENTS
FOR SECURITY SERVICES:
1.On the Part of the Security Agency:
 12% Output Tax shall be based on the
Agency Fee which in turn will be the Input
Tax of its Client.
 Salaries of the Security Guards will not
form part of the its gross receipts subject to
VAT but shall be recognized as a
LIABILITY of the security agency.
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III. VAT TREATMENT OF THE
PAYMENTS
FOR SECURITY SERVICES:
2. On the Part of the Client:
 Input Tax credit is based on the
Agency Fee paid by the Client.
 VAT official receipt must be
issued to the Client.
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III. VAT TREATMENT OF THE
PAYMENTS
FOR SECURITY SERVICES:
2. On the Part of the Client:
 The Client can not claim Input Tax
Credit on the salary portion of the
Security Services Expense because it
pertains to service Exempt from VAT
pursuant to Sec 109 (I) of the NIRCServices rendered by individual
pursuant to employee-employer
relationship
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IV. MANNER OF ISSUING RECEIPT
FOR THE ENTIRE CONTRACT PRICE:
On the Agency Fee:
VAT Official Receipt must be issued pursuant to Sec
113 of the NIRC as implemented by Sec. 4.113-1 of
RR 16-2005.
The receipt should cover only the amount of Agency
Fee paid with the indication that such amount
received includes the VAT. The VAT must be shown
as a separate item in the VAT Official Receipt.
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IV. MANNER OF ISSUING RECEIPT
FOR THE ENTIRE CONTRACT PRICE:
On the Security Guards’ Salaries:
 Must be covered by a Non-VAT
Acknowledgement Receipt.
 Duly Notarized Certification of the
Expanded Withholding Taxes (see ANNEX
A of this RMC) must also be submitted.
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