June 3, 2010

BIR RULING NO. 008-10

Sec. 24 (A); RR 2-98; E.O. 782

Department of Health
Building #1, San Lazaro Compound,
Rizal Avenue, Sta. Cruz, Manila

Attention: Atty. Ronald R. de Veyra, CEO IV

Director III-Legal Service
Mr. Laureano C. Cruz
OIC-Financial and Management Service

Gentlemen :

This refers to your request for legal opinion on the applicable withholding tax
rates for job-order contract employees. ITCcAD

It is represented that the Department of Health (DOH) has employed contractual

personnel ranging from professionals like doctors, nurses, pharmacists, certi ed public
accountants, etc. and non-professionals like clerks, administrative o cers, and etc.;
that these contractual personnel are hired either as regular or on a job-order basis; that
prior to calendar year 2009, salaries of these employees were treated as compensation
thus, compensation income tax was used; that subsequently, upon verbal information
from the BIR, compensation of newly hired contractual personnel could be subject to
either ten percent (10%) expanded withholding tax or 3% percentage tax depending on
the classi cation of employee as professional or non-professional; and that the DOH
now seeks to be clarified on the applicable tax rates for said personnel.
In reply, please be informed that personnel, professional or non-professional,
employed on contractual or regular basis shall be subject to withholding tax on
compensation as provided by the following sections of the Revenue Regulations (Rev.
Regs.) 2-98, as amended, in relation to Section 24 (A) of the 1997 Tax Code, as
amended:
"SECTION 2.78. Withholding Tax on Compensation. — The withholding of
tax on compensation income is a method of collecting the income tax at source
upon receipt of the income. It applies to all employed individuals whether citizens
or aliens, deriving income from compensation for services rendered in the
Philippines. The employer is constituted as the withholding agent.

SECTION 2.78.1. Withholding of Income Tax on Compensation Income. —

(A) Compensation Income De ned. — In general, the term "compensation"

means all remuneration for services performed by an employee for his employer
under an employer-employee relationship, unless speci cally excluded by the
Code.

The name by which the remuneration for services is designated is

immaterial. Thus, salaries, wages, emoluments and honoraria, allowances,
commissions (e.g., transportation, representation, entertainment and the like);
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 fees including director's fees, if the director is, at the same time, an employee of
the employer/corporation; taxable bonuses and fringe bene ts except those
which are subject to the fringe bene ts tax under Sec. 33 of the Code; taxable
pensions and retirement pay; and other income of a similar nature constitute
compensation income.

The basis upon which the remuneration is paid is immaterial in

determining whether the remuneration constitutes compensation. Thus, it may be
paid on the basis of piece-work, or a percentage of pro ts; and may be paid
hourly, daily, weekly, monthly or annually. SEHaTC

Remuneration for services constitutes compensation even if the

relationship of employer and employee does not exist any longer at the time when
payment is made between the person in whose employ the services had been
performed and the individual who performed them.

Rev. Regs. 2-98, as amended, also de nes and distinguishes an "employee" from
a professional who renders services for a fee, thus:
"SECTION 2.78.3. Employee. — The term "employee" is an individual
performing services under an employer-employee relationship. The term covers all
employees, including o cers and employees, whether elected or appointed, of the
Government of the Philippines, or any political subdivision thereof or any agency
or instrumentality.

In general, the relationship of the employer and employee exists when the
person for whom services were performed has the right to control and direct the
individual who performs the services, not only as to the result to be accomplished
by the work but also as to the details and means by which the result is
accomplished. An employee is subject to the will and control of the employer not
only as to what shall be done, but how it shall be done. In this connection, it is not
necessary that the employer actually directs or controls the manner in which the
services are performed. It is sufficient that he has the right to do so.
The right to dismiss an employee is also an important factor indicating
that the person possessing that right is an employer. Other factors or
characteristics of an employer, which may not be necessarily present in every
case, are furnishing the tools and furnishing of a place to work, to the individual
who performs the services. In general, an individual is not considered an
employee if he is subject to the control or direction of another merely on to the
result to be accomplished by the work, and not on to the means and methods for
accomplishing the result.
In general, individuals who follow an independent trade, business, or
profession, in which they offer their services to the public, are not employees.
The measurement, method or designation of compensation is also
immaterial if the relationship of employer and employee in fact exists.

No distinction is made between classes or grades of employees. Thus

superintendents, managers, and others belonging to similar levels are employees.
An o cer of a corporation is an employee of the corporation. An individual,
performing services for a corporation, both as an o cer and director, is an
employee subject to withholding on compensation, including director's fees."
(Emphasis supplied) TIAEac

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 For professionals who are paid for the services they render, they are subject to a
withholding tax rate of 10% on the gross professional fee, as follows:
"SECTION 2.57.2. Income Payment Subject to Creditable Withholding Tax
and Rates Prescribed Thereon. — Except as herein otherwise provided, there shall
be withheld a creditable income tax at the rates herein speci ed for each class of
payee from the following items of income payments to persons residing in the
Philippines:

(A) Professional fees, talent fees, etc., for services rendered by individuals
— On the gross professional, promotional and talent fees or any other form of
remuneration for the services of the following individuals — Ten percent (10%);

(1) Those individually engaged in the practice of professions or

callings: lawyers; certi ed public accountants; doctors of
medicine; architects; civil, electrical, chemical, mechanical,
structural, industrial, mining, sanitary, metallurgical and geodetic
engineers; marine surveyors; doctors of veterinary science; dentist;
professional appraisers; connoisseurs of tobacco; actuaries; and
interior decorators;

(2) . . ."

In view of Executive Order (E.O.) 782 dated February 10, 2009 ("Instituting
Measures to Assist Workers Affected by the Global Financial Crisis and Temporary
Filling Up of Vacant Positions in the Government") and as implemented by DOLE-DBM
Joint Circular No. 01-09 dated March 23, 2009, all departments and agencies of the
government; including government-owned and/or -controlled corporations and
government nancial institutions, are authorized to set aside 1.5% of their MOOE to hire
personnel on job order basis, preferably the displaced workers and/or their dependents
of employable age, for a period "but not to go beyond one month after the approval of
the agency's Rationalization Plan or December 31, 2009, whichever comes earlier . . .". 1
The DOLE-DBM Joint Circular No. 01-09 2 provides:
"2.4 Per Civil Service Commission Memorandum Circular No. 17, s. 2002,
services rendered by job order personnel shall not be considered as government
service. Moreover, said personnel are only entitled to the basic salary of the
position." (Emphasis supplied) EHCDSI

Moreover, under CSC Memorandum Circular No. 38, s. 1993 (now reproduced
under Rule XI, Omnibus Rules on Appointment and Other Personnel Actions/CSC
Memorandum Circular No. 40, s. 1998), services rendered under contracts of services
and job orders are not considered government services; and contracts do not have to
be submitted to the CSC for approval; the employees involved in the contract or job
orders do not enjoy the bene ts enjoyed by government employees such as PERA,
COLA and RATA; no employer-employee relationship exists; and they are not covered by
civil service law. (CSC Resolution No. 98-2895 dated November 10, 1998)
From the foregoing, it is clear that the performance of services by the job-order
personnel, who is a non-professional, hired pursuant to EO 782 is not under an
"employer-employee relationship" hence, it is a sale of service which may be construed
under Section 108 of the 1997 Tax Code, as amended, to wit:
"Section 108. Value-Added Tax on Sale of Services and Use or Lease of
Properties. —
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 (A) Rate and Base of Tax. —
(i) . . .

(ii) . . .
The phrase "sale of or exchange of services" means the
performance of all kinds of services in the Philippines for others
for a fee, remuneration or consideration, including those
performed or rendered by construction and service contractors;
xxx xxx xxx"

The annual gross receipts of the subject personnel, however, may not exceed
P1,500,000.00 which exempts them from value-added tax under Section 109 (1) (V) but
subjects them to the 3% percentage tax under Section 116 of the same Tax Code, as
follows: caSDCA

"SEC. 109. Exempt Transactions. — (1) Subject to the provisions of

subsection (2) hereof, the following transactions shall be exempt from the value-
added tax:

xxx xxx xxx

(V) Sale or lease of goods or properties or the performance of services
other than the transactions mentioned in the preceding paragraphs, the gross
annual sales and/or receipts do not exceed the amount of One million ve
hundred thousand pesos (P1,500,000). Provided, That not later than January 31,
2009 and every three (3) years thereafter, the amount herein stated shall be
adjusted to its present value using the Consumer Price Index as published by the
National Statistics Office (NSO)"
"Section 116. Tax on Persons Exempt from Value-Added Tax. — Any
person whose sales or receipts are exempt under Section 109 (1)(V) of this Code
from the payment of value-added tax and who is not a VAT-registered person
shall pay tax equivalent to three percent (3%) of his gross quarterly sales or
receipts: . . ."

Thus, the remuneration which is equivalent to the salary of the position and to be
received by the job-order personnel shall be subject to a percentage tax equivalent to
three percent (3%) of his gross quarterly sales or receipts.
As to the applicable withholding tax rate, Section 5.116 of Revenue Regulations
(Rev. Regs.) No. 2-98, as amended, requires the withholding of percentage tax and
states that:
"Sec. 5.116. Withholding of Percentage Tax. —

Bureaus, o ces and instrumentalities of the government, including

government-owned or controlled corporations as well as their subsidiaries,
provinces, cities and municipalities making any money payment to private
individuals, corporations, partnerships and/or associations are required to deduct
and withhold the percentage taxes due from the payees on account of such
money payments.
(A) Internal revenue taxes required to be withheld. — Percentage taxes on
gross money payments to the following shall be subjected to withholding at the
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 rates herein prescribed: TIcEDC

(1) Persons Exempt from Value-Added Tax (VAT). — On gross

payments to persons who are exempt under 109(z) [now Sec.
109(1)(V)] of the Code from payment of value added tax and who
is not a VAT registered person except payment to cooperatives —
three percent (3%).
xxx xxx xxx"

Remuneration of professionals hired under EO 782 shall be subject to 15% or

10% expanded withholding tax pursuant to Section 2.57.2 (A) of Rev. Regs. 2-98, as
amended,
(A) Professional fees, talent fees, etc., for services rendered by individuals
— On the gross professional, promotional and talent fees or any other form of
remuneration for the services of the following individuals — Fifteen percent (15%),
if the gross income for the current year exceeds P720,000; and Ten percent (10%),
if otherwise;" (underscoring * supplied)

After perusal of the enumerated individuals subject to withholding tax following

the aforestated provision, there is no instance found to be applicable for non-
professionals that are hired as job-order personnel. It is to be considered that the
services to be performed by clerks and administrative o cers cannot qualify as a
practice of profession or calling for which a professional, promotional or talent fee is
paid as referred to in the foregoing provision.
Furthermore, Section 2.57.2 (N) of Rev. Regs. 2-98, as amended, does not
likewise apply. Said provision states —
"(N) Income payments made by the government to its local/resident
supplier of goods and local/resident supplier of services other than those covered
by other rates of withholding tax — Income payments, except any single purchase
which is P10,000 and below, which are made by a government o ce, national or
local, including barangays, or their attached agencies or bodies, and government-
owned, or -controlled corporations, on their purchases of goods and purchases of
services from local/resident suppliers AEDcIH

Supplier of goods — One percent (1%)

Supplier of services — Two percent (2%)

xxx xxx xxx"

The provision covers withholding tax on income payments made by the

government to its local/resident supplier of services. The term "local/resident supplier"
is de ned under the context of Sec. 2.57.2 (M), where it pertains to a supplier from
whom any of the top twenty thousand (20,000) private corporations, as determined by
the Commissioner, regularly makes its purchase of goods. The term "regular suppliers"
refers to suppliers who are engaged in business or exercise of profession/calling with
whom the taxpayer-buyer has transacted at least six (6) transactions, regardless of
amount per transaction, either in the previous year or current year. The same rules apply
to local/resident supplier of services other than those covered by separate rates of
withholding tax.
Similarly, the term "local/resident supplier" as used in Sec. 2.57.2 (N), may refer
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 to a supplier from whom the government regularly makes its purchase of goods and
that the term "regular supplier" has the same meaning as in the preceding sub-section.
Taking into account the nature and the kind of services to be performed by the
job-order personnel under their contract, the same cannot be considered as
"local/resident suppliers" as referred to in the abovecited provision. The said personnel
cannot be deemed to be "regular suppliers" because the transaction between them and
the government is only in this instance as it was pursuance to E.O. 782 and which
contract for service is only for the period of September 1 until December 31, 2009.
Therefore, based on the foregoing, compensation of professionals and non-
professionals hired as regular or contractual employees of the DOH are subject to the
graduated rates of withholding tax on compensation under Section 2.78 of Rev. Regs.
2-98, as amended; remunerations of or income payments to professionals hired under
job-order basis pursuant to EO 782 shall be subject to 10% creditable withholding tax
under Section 2.57.2 of Rev. Regs. 2-98; and non-professionals hired under job-order
basis pursuant to EO 782 shall be subject to a percentage tax at three percent (3%) of
their gross quarterly sales or receipts pursuant to Section 116 of the 1997 Tax Code,
as amended, and the BIR shall withhold 3% on the gross payment to said personnel
pursuant to Section 5.116 of Rev. Regs. No. 2-98, as amended. ITaCEc

This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation, it will be disclosed that the facts are different, then this
ruling shall be considered null and void.

Very truly yours,

(SGD.) JOEL L. TAN-TORRES

Commissioner of Internal Revenue
Footnotes
1. DBM Circular No. 2009-9 dated June 19, 2009.
2. Implementing Guidelines of Executive Order No. 782.

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