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 income3

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.4

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 17,931.77

Prepaid Income Tax (2% EWT

on agency fee) 68.23

Credit: Service Income (agency fee) 3,411.54

Output Tax (on agency fee) 409.38

Due to Security Guards 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 12,617.11

Withholding Tax Payable 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. 12

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 17,931.77

WHT Payable(2% EWT on

agency fee) 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 NIRC-Services 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.18