Manpower supply services

Duty Free Phils. Services Inc. wants to know if its employees are indeed exempt from VAT under Section 109(O) of the National Internal Revenue Code of 1997.

On June 30, 1998, the Philippine Tourism Authority (Duty Free Phils. Division) entered into a contract for professional services with Employment Consultants of the Phils., Inc. The salient terms and conditions of the ECPI-PTA (DFP) contract were:

• ECPI will provide PTA(DFP) with qualified personnel to staff the DFP stores and other facilities;

• ECPI agrees to hire and then second to PTA (DFP) all employees below the rank of deputy general manager (and excluding all consultants) in its plantilla as of June 30, 1998;

• PTA (DFP) management will approve all selection of personnel, promotion, employee transfers, disciplinary actions, merit increases, and termination;

• ECPI has the right to provide its employees with bonuses directly out of its net income without PTA (DFP)’s approval;

• ECPI will provide the employees with uniforms, shuttle service, training, salaries, bonuses, employee benefits and insurance;

• Since they are its employees, ECPI will indemnify and/or reimburse PTA (DFP) for any claims, including damages, which may be filed by the employees against it in the future;

• In exchange for its manpower supply services, ECPI will receive a basic fee equivalent to the monthly cost per head/level of employee in the plantilla as follows: non-technical staff, P4,051.50; technical staff, P4,855.52; supervisory, P7,393.41; and managerial, P15,575.75.

• The basic fee shall be payable to ECPI within seven days from the end of each payroll period; and

• Over the basic fees, ECPI will receive an overhead and administration cost of 15%.

ECPI was formed by the contractual employees of PTA (DFP) for the sole purpose of rendering services exclusively to PTA (DFP). A few months after entering into the contract for professional services, these same ECPI employees formed the DFPSI and the contract was assigned to DFPSI with the approval of PTA( DFP).

In 1996, however, the Duty Free Employee Association filed a petition for certification election with the Department of Labor and Employment, seeking recognition as the sole and exclusive bargaining agent of PTA (DFP). The Secretary of DoLE granted DEA’s petition because "DFP is clearly the employer" of the DFPSI employees. DFP appealed to DoLE decision before the Supreme Court. In a resolution dated Dec. 7, 1998, the Supreme Court dismissed the appeal, stating that no grave abuse of discretion was committed by DoLE.

Based on the DoLE and Supreme Court decisions, DFPSI entered into an agreement with DEA on Feb. 10, 1999. In the agreement, DFPSI recognized DEA as the sole bargaining agent of all employees with the DFP. As such, the services rendered by DFPSI employees should not be subject to VAT.

We confirm the exemptions of the employees from VAT as service providers.

Section 109(O) of the Tax Code of 1997 provides that services rendered by individuals in an employer-employee relationship are exempt from VAT. It is on this basis that the employees are not VAT-registered and that they not bill VAT on the compensation they receive. The payor of these salaries is DFPSI and nowhere in the records can it be found that it was ever billed VAT by the employees.

There is, however, also a contract entered into between DFPSI and PTA (DFP) for the supply of manpower. For this, DFPSI, a VAT-registered entity, is considered as the seller of services under Sections 105 and 108 of the Tax Code. This means the gross receipts derived by DFPSI from PTA (DFP) representing the contract price (the basic salary per employee plus the add-on 15% overhead and administration cost) is subject to VAT as compensation for services sold.

The term "sale or exchange of services" broadly embraces the performance of all kinds of services for others in the Philippines such as a fee, remuneration or consideration, regardless of whether the performance calls for the exercise or use of physical or mental faculties.

This covers any transaction undertaken in the course of business in the Philippines for a valuable consideration, whether actually or constructively received, and which is not expressly exempt from VAT under the Code or special law of international agreement to which the Philippines is a signatory. The valuable consideration would be the amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advance payments actually or constructively received during the taxable quarter from another person.

In summary, it is the opinion of this office that the income derived by the subject employees under an employer-employee relationship is exempt from VAT. The gross receipts derived by DFPSI for providing PTA (DFP) the qualified personnel is, however, subject to VAT. (VAT Ruling No. 60-97 dated Sept. 30, 1997 and VAT Ruling No. 140-98 dated Sept. 29, 1998).

(VAT ruling No. 52-2001 dated Aug. 2, 2001. This ruling is issued on the basis of represented facts. However, if upon investigations, it will be disclosed that the facts are different, then this ruling shall be considered null and void).