NIRC Tax Research Journal Vol. XXVILS September-October 2015 Tax Treatment of Commissions Under the National Internal Revenue Code (NIRC) of 1997, as Amended” 1. INTRODUCTION ‘Commission is defined as “the compensation or reward paid to a factor, broker, agent, bailee, executor, trustee, receiver, ete. which is usually calculated as a percentage of the amount of his transactions or amount received or expended”'. Under the NIRC of 1997, in general, the tax treatment of income received in the form of a commission depends on the relationship that exists between the payor and the payee or the recipient of the said form of income. If there exists an employer-employee relationship between the payor and the payee, and the commission is being paid to the employee in view of that relationship, such income takes the form of compensation in the hands of the employee. Section 2.78.3 of Revenue Regulations (RR) No. 2-987, as amended, provides that 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 the employer has the right to do so. Another important factor indicating that the person possessing that right is an employer is the Prepared by Robert D. Aspa, Tax Specialist Il, reviewed by Roselyn C. Domo, Supervising Tax Specialist and Donaldo M. Boo, Chief Tax Specialist, Direct Taxes Branch, NTRC. ' Henry Campbell Black, Black's Law Dictionary, (St. Paul, Minnesota: West Publishing Co., 1986), p85. Implementing Republic Act (RA) No. 8424, "An Act Amending the National Internal Revenue Code, as Amended” Relative to the Withholding on Income Subject to the Expanded Withholding Tax and Final Withholding Tax, Withholding of Income Tax on Compensation, Withholding of Creditable Value-Added Tax and Other Percentage Taxes, Issued on April 17, 1998, (Bs Tax Treatment of Commissions Under the NIRC of 1997, as Amended[INTRC Tax Research Journal Vol. XXVII5 September-October 2015 right to dismiss an employee. Another characteristic of an employer, which may not be necessarily present in every case, is the provision of the tools and place to work to the individual who performs the services. The measurement, method or designation of ‘compensation is also immaterial if the relationship of employer and employee in fact exists. On the other hand, Sec. 2.78.1 (A) of RR 2-98, as amended, provides for the definition on what constitutes “compensation income”, to wit: “SECTION 2.78.1. Withholding of Income Tax on Compensation Income. - (A) Compensation Income Defined. — In general, the term "compensation" means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically 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); fees including director's fees, if the director is, at the same time, an employee of the employer/corporation; taxable bonuses and fringe benefits except those which are subject to the fringe benefits tax under Sec. 33 of the Code; taxable pensions and retirement pay; and other income of a similar nature constitute compensation income. (Emphasis supplied) 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 profits; and may be paid hourly, daily, weekly, monthly or annually. Xxx’ Based on the aforementioned, if the commission income is received by an individual taxpayer under an employer-employee relationship, such income is treated as employee compensation and is therefore subject to withholding taxes’ applied to salaries and wages of an employee. The commission will form part of the employee's compensation income for Purposes of computing his/her monthly withholding taxes and income tax payment at the end of the year and will likewise be reported in the employee withholding statement (BIR Form No. 2316)'. In general, every employer shall deduct and withhold from an employee's ‘compensation a tax determined in accordance with the prescribed withholding tax tables. Sec. 2.78 of RR 2-98, as amended, provides that 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 individuals whether citizens or aliens, deriving income from compensation for services rendered in the Philippines. ‘The employer is constituted as the withholding agent, * ‘The employer must furnish a copy of BIR Form No. 2316 to every employee from whose taxes are withheld from their compensation, on or before January 31 of the succeeding year, or if his/her employment is terminated before the close of such calendar year, on the day on which the last payment of compensation is ‘made. (Section 2.83.1, RR 2-1998, as amended) (Ta Treatment of Commibsions Under the MIRC of IBY. ax Amended aNTRC Tax Research Journal ‘Vol. XXVILS September-October 2015 In the case of commission income received by an individual who is not under an employer-employee relationship, such income is subject to creditable withholding tax (CWT). Section 2.57.2 (G) and (O) of RR 2-98, as last amended by RR 10-2013° and RR 17-2003° respectively, provide as follows: “SECTION 2.57.2. Income Payment Subject to Creditable Withholding Tax and Rates Prescribed Thereon. — (G) Income payments to certain brokers and agents, - On gross commissions of customs, insurance, stock, immigration and commercial brokers, fees of agents of professional entertainers and real estate service practitioners (RESP), (i.e. real estate consultants, real estate appraisers and real estate brokers) who failed or did not take up the licensure examination given by and not registered with the Real Estate Service under the Professional Regulations Commission. ~ Ten percent (10%); XXX (O) Commissions of independent and/or exclusive sales representatives, and marketing agents of companies. — On gross commissions, rebates, discounts and other similar considerations paid/granted to independent and/or exclusive sales representatives and marketing agents and sub-agents of companies, including multi-level marketing companies, on their sale of goods or services by way of direct selling or similar arrangements where there is no transfer of title over the goods from the seller to the agent/sales representative. - Tem percent (10%); xxx In the case of professionals, among other individuals cited under Sec. 2.57.2(A) of RR 2-98, as amended, their income from commission will form part of their gross income which could either be subject to fifteen percent (15%) CWT (if the gross income for the current year exceeds PhP720,000) or ten percent (10%), if otherwise. Given the nature of the tax as creditable, such withheld taxes are to be credited against the income tax due of the recipient. The recipient of the commission income needs to report the same in his income tax retum and claim the withheld taxes as credit. 5 Amending Further Pertinent Provisions of RR 2-98, as Last Amended by RR 30-2003, Providing for the Inclusion of Real Estate Service Practitioners (i.e. Real Estate consultant, Appraiser and’ Broker) Who Passed the Licensure Examination given by the Real Estate Service under the Professional Regulations Commission as defined in RA 9646, “The Real Estate Service Act of the Philippines” as Among Those Professionals Falling Under Section 2.57.2(A)(1) of RR 2-98, as Amended, and RR 14-2002 as Regards Income Payments to Certain Brokers and Agents. Issued on May 2, 2013. © Amending Further Pertinent Provisions of RR 2-98, as Amended, Providing for Additional ‘Transactions Subject to Creditable Withholding Tax; Re-Establishing the Policy that the Capital Gains Tax on the Sale, Exchange or Other Disposition of Real Property Classified as Capital Assets Shall be Collected as a Final Withholding Tax, Thereby Further Amending RRs 8-98 and 13-99, as Amended by RR 14-2000; and for Other Purposes. Issued on March 31, 2003, (ae Tex Treatment of Commissions Under the NIRC of 1997, os AmendedNTRC Tax Research Journal Vol. XXVIIS September-October 2015 The amount of CWT on the income from commission of a professional is to be withheld by a withholding agent, net of applicable Value-Added Tax (VAT) and the same will be remitted by the withholding agent to the government. Likewise, the withholding agent is also obligated to furnish the payee with a withholding tax statement using BIR Form No. 2307 (Certificate of Creditable Tax Withheld at Source) on or before the 20th day of the month following the close of the taxable quarter. Upon request of the payee, however, the payor must furnish such statement to the payee simultaneously with the income payment. The form shall contain the income payments made to the payee and the amount of taxes withheld therefrom for every month of the quarter. It should be noted that BIR Form No. 2307 serves as a proof of a taxpayer's claim for creditable taxes withheld from the commission income received. Based on the above scenario, such professional is required to pay his/her quarterly income tax through the filing of BIR Form No. 1701Q (Quarterly Income Tax Return for Self-Employed Individuals). In this ease, he/she will be allowed to offset the creditable taxes withheld for the quarter against current tax liability. If a professional receives commission income, he/she shall report such income in his Annual Income Tax Return (BIR Form No. 1701) and will be entitled to claim the creditable taxes withheld therefrom. It should also be mentioned that a professional may also be subject to either Percentage Tax (PT) of 3% or VAT of 12% depending on the registration status and the amount of gross annual sales or receipts or both. A professional is liable to pay PT if he/she is not a VAT-registered person and his/her gross annual sales and/or receipts for the past twelve (12) months does not exceed the amount of PhP1,919,500". Otherwise, such professional is liable to pay VAT and will be required to change his/her status as VAT- registered upon reaching the threshold amount of PhP1,919,500. 7 Per RR 16-2011 with subject, “Increasing the Amount of Threshold Amounts for Sale of Residential Lot, Sale of House and Lot, Lease of Residential Unit and Sale or Lease of Goods or Properties or Performance of Services covered by Section 109 (P), (Q) and (V) of the Tax Code of 1997, As Amended, Thereby ‘Amending Certain Provisions of RR 16-2005, As Amended, Otherwise Known as Consolidated VAT Regulations of 2005”. Issued by the BIR on October 28, 2011. (Tax Treatment of Commissions Under the NIRC of 197. ax tended 3