Government employees under contract subject to VAT, 3% tax rate–BIR

THE Bureau of Internal Revenue (BIR) has clarified the tax treatment of salaries paid by the government to its personnel who are engaged under a contract of service or job-order arrangement.

Internal Revenue Commissioner Caesar R. Dulay issued Revenue Memorandum Circular 130-2016, citing a common issue, “which arise on the appropriate rate of withholding tax that will be imposed on the payment of services rendered by government personnel rendering services under a job-order arrangement.”

Dulay’s circular said government personnel hired under job-order arrangements are not employees of the government, and are, thus, considered as service contractors who are taxed differently on the remuneration they receive for rendering such services.

“It is settled that under existing policies and guidelines of the Civil Service Commission, defining the terms ‘individual contract of services/job order’ and clarifying the terms ‘contract of service’ and ‘job order’, there is no employer-employee relationship created under either a job order or contract for service, and that services rendered pursuant thereto shall not be considered government service,” the circular clarified.

Thus, the circular said government employees who are nonprofessionals shall be taxed either as a value-added tax (VAT)-registered taxpayer, if he qualifies as such, or as a service contractor required to pay a 3-percent withholding tax on money payments received from the government.

“The performance of services by the job-order personnel pursuant to Executive Order 782 or Executive Order 366 is not under an employer-employee relationship,” the circular said. “Hence, it is a sale or performance of service.”

If such sale or performance of service amounts to more than the VAT threshold of P1,919,500 for the taxable year, then such job-order personnel shall be subject to the payment of 12 percent VAT.

In determining whether a job-order personnel of the government has reached the VAT threshold, his other income from other lines of business, which can be subjected to VAT shall be aggregated with his income from the sale or performance of service in the job-order contract with the government.

Even if the job-order personnel does not meet the VAT threshold, he would still be required to pay a percentage tax of three percent to be withheld at source.

Dulay’s circular cited Section 5.116 of Revenue Regulations  2-98 requiring the withholding of percentage tax to any money payment made by the government or any of its bureaus, offices and instrumentalities, including government-owned or -controlled corporations.

Under the cited provision, persons exempt from VAT shall be required to pay a 3-percent withholding tax on gross money payments made by the government to them.

Dulay’s circular provides for a higher tax rate on job-order personnel who are professionals, such as lawyers
and accountants.

“In general, individuals who follow an independent trade, business or profession, in which they offer their services to the public, are not employees,” the circular said.

“For professionals who are paid for the services they render, they are subject to a withholding tax rate of 10 percent or 15 percent, whichever is applicable, on their gross professional fee,” it added.

For professionals having a gross income of more than P720,000 for the current taxable year, a creditable withholding tax of 15 percent shall be imposed on the gross income; if the gross income is less than or equal to P720,000 then the creditable withholding tax rate shall be 10 percent.

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Dave Cagahastian is BusinessMirror's reporter covering the Office of the President and the Department of Labor and Employment. He has recently finished a law degree from the University of the Philippines, and holds a business degree from the International Academy of Business and Economics. In the past two years in a row, he had won the Sinag Financial Literacy Journalism Award sponsored by Sun Life Financial Philippines, getting the third place in 2014 then ‎the first prize in 2015.