REVENUE MEMORANDUM ORDER NO.

3-2009

Amendment and Consolidation of the Guidelines in the Conduct of Surveillance and Stock-Taking
Activities, and the Implementation of the Administrative Sanction of Suspension and Temporary
Closure of Business. January 15, 2009

 SEC. 115. Power of the Commissioner to Suspend the Business

Operations of a Taxpayer. - The Commissioner or his authorized representative is
hereby empowered to suspend the business operations and temporarily close the
business establishment of any person for any of the following violations:
 a. In the case of a Value -Added Tax (VAT)-registered person
 Failure to issue receipts or invoices;
 Failure to file a VAT return as required under Section 114; or
 Understatement of taxable sales or receipts by 30% or more of
his correct taxable sales or receipts for the taxable quarter.
 b. Failure of any person to register as required under Sec. 236
 The temporary closure of the establishment shall be for the duration of not less
than five (5) days and shall be lifted only upon compliance with whatever
requirements prescribed by the Commissioner in the closure order.

The Order provides the guidelines governing the enforcement of the administrative
sanction of suspension and temporary closure of business relative to the following
provisions of the NIRC, as amended:

 a. Sec. 113 – Invoicing and Accounting Requirements for VAT-Registered Persons

 i. Invoicing requirements
 ii. Information contained in the VAT Invoice or VAT Official Receipt
 iii. Accounting requirements
 iv. Consequence of issuing erroneous VAT Invo ice or VAT Official Receipt
 v. Transitional Period
 b. Sec. 114 – Return and Payment of VAT
 i. General provisions
 ii. Where to file the return and pay the tax
 iii. Withholding of VAT
 c. Sec. 236 – Registration Requirements
 i. Requirements
 ii. Annual registration fee
 iii. Registration of each type of internal revenue tax
 iv. Transfer of registration
 v. Other updates
 vi. Cancellation of registration
 vii. Persons required to register for VAT
 viii. Optional registration for VAT of exempt person
 ix. Supplying of Taxpayer Identification Number (TIN)
 d. Sec. 237 – Issuance of Receipts or Sales or Commercial Invoices
 e. Sec. 238 – Printing of Receipts or Sales or Commercial Invoices
All surveillance activities shall be covered by Mission Orders (MOs). The MOs shall be printed as
accountable forms to be requisitioned by the Revenue Officials authorized to sign said MOs. The
Accountable Forms Division shall be the custodian of blank MOs, and shall maintain a register of
all MOs issued to the following authorized Revenue Officials:
The Head of the Investigating Office/Division shall in turn request for MOs from the concerned
Regional Director/ACIR.

 Overt Surveillance shall be conducted for a minimum period of ten (10) days and a
maximum period of thirty (30) days, unless otherwise extended in writing by the
authorized signatory. A weekly progress report shall be rendered by the concerned
implementing officers to the Head of the Investigating Office/Division.
 Round-the -clock observation/monitoring shall be done on the target taxpayer’s
business if the nature of the business so requires, as in the case of motels and hotels.
 The findings may be used as the basis for assessing taxes for the other months or quarters
of the same or different taxable years, and such assessment shall be deemed prima facie
correct.
 Implementing officers shall not be assigned new surveillance cases until after they have
reported the surveillance cases previously assigned to them.

GUIDELINES AND PROCEDURES

A. SURVEILLANCE ACTIVITIES

 1. PRELUDE TO SURVEILLANCE
 Before the actual surveillance, the Head of the Investigating Office/ Division must:
 a. Acquaint himself with the business organization and economic activity of the subject
 of surveillance ,the location of the stores and outlets, the accounting records used and
such other relevant information as may be available and/or necessary. This must be done
with relative secrecy to prevent leakage of information to the SUBJECT.
 b. Prepare the necessary MO for approval and signature of the concerned Regiona
 Director/ACIR, as the case may be. The number of MOs must correspond to the number
of stores and outlets to be observed/monitored in case of overt surveillance. A different
set of implementing officers shall be assigned for different stores and outlets of the same
SUBJECT.
  c. Brief the implementing officer on the acts to be performed in compliance with the
MOs. The briefing shall be done within thirty (30) minutes before the actual surveillance.
To preserve the confidentiality of the surveillance operation, the identity of the target
SUBJECT should be revealed to the implementing officers only upon arrival at the site of
operations.

 2. CONDUCT OF SURVEILLANCE
 At least two (2) implementing officers comprised of Revenue Officers (Ros)
(Assessment/Excise), Intelligence Officers and Special Investigators assigned in the
following investigating offices/divisions shall be authorized to conduct surveillance
activities on identified business establishment based on a validly issued MO signed by the
concerned authorized revenue official:

 No surveillance activities shall be conducted nor apprehension effected unless the same
has been authorized by a Mission Order issued in accordance with the provisions of this
Order.
 Implementing officers conducting the surveillance must possess the following qualities:
 Ordinary Appearance
 Ability to act naturally under all circumstances
 Alertness
 Resourcefulness
 Keen observation and good memory
 Patience and endurance

PERFORMANCE OF SURVEILLANCE ACTIVITIES

 Covert Surveillance – the surreptitious and undercover watch on the business
operations of a person for a certain period before the conduct of the inventory of
business documents, apprehension/seizure of said documents and properties
found to be the subject of violations of the provisions of the NIRC.
 Overt Surveillance – the type of surveillance which commences with the
inventory-taking of the business documents as mentioned above of the person
 under surveillance followed by the actual observation and close monitoring of the
business activities of such person.

3. ANALYSIS OF SURVEILLANCE RESULTS

 Extrapolate the data gathered from the surveillance by using the following
formulas:

 Compare the extrapolated data with the recently filed monthly /

quarterly internal revenue tax returns to determine significant
variations in sales / revenues.
 Determine violations of internal revenue laws, rules and regulations of
the SUBJECT such as the usage of unregistered CRM / POS or invoices /
official receipts and non-issuance of invoices / official receipts.

 4. ACTION ON SUREVEILLANCE RESULTS

 If after the conclusion of the surveillance, there is a sufficient ground for the closure of the
establishment, a recommendation shall be made to effect such closure.
 If the result of the surveillance made likewise indicates that the taxpayer had not been, in
fact, correctly reporting income for tax purposes, and that the veracity of his accounting
records is not reliable, the Commissioner or Regional Director concerned shall issue a
Letter of Authority (LA) for the investigation of the taxpayer. The Revenue Officer named
in the LA shall proceed with the audit and cause the assessment of the taxpayer’s internal
revenue tax liabilities, based either on:
 (a)surveillance;
 (b) best evidence rule; and/or
 (c) the result of the tax audit.

In order to avoid multiple surveillance activities being conducted upon one

taxpayer by several offices of the Bureau and to clearly define which office shall
conduct surveillance activities, the following rules shall be observed:
 a. If the basis of the surveillance activities comes from information gathered from the
internal sources of the Bureau, the surveillance activities shall be conducted by the RDO,
LTAID I, LTAID II, or LTDO with respect to taxpayers falling under their respective
jurisdictions; and
 b. If the basis of surveillance activities comes from confidential information filed by an
informer or from other external sources, the surveillance activities shall be conducted by
 the NID and PCD. The ACIR–ES, however, in consultation with the Head of the
Investigating Office, may decide to refer the case to the SID or RDO/LTDO, if the case so
warrants.

REVENUE MEMORANDUM CIRCULAR NO. 34 -2008 clarifies the tax treatment of director’s
fees for Income Tax and business tax purposes.

Under section 79, in relation to Section 24(A), both of the National Internal Revenue Code
(Tax Code), as amended, director’s fees are subject to the withholding tax on wages. The said
tax treatment applies whenever it is established that the director and the corporation has an
employer-employee relationship (i.e President of a corporation sitting as a member of the Board
of Directors).

Revenue Regulations (RR) No. 2-98 provides that “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 . Thus, fees including director’s
fees, if the director is, at the same time, an employee of the employer/corporation constitute
compensation income (Section 2.78.1, RR No. 2-98). Accordingly, the director’s fees received by
employees are exempt from the Value -Added Tax (VAT) under Section 109 of the Tax Code.

However, if these fees are paid to a director who is NOT an employee of the corporation
paying such fees (i.e. whose duties are confined to the attendance of and participation in the
meetings of the board of directors), such fees are not treated as compensation income because
of the absence of employer-employee relationship, but rather, the same should squarely fall under
Section 32(A)(2) of the Tax Code under the caption “Gross income derived from the conduct of
trade or business or exercise of a profession.” The fees received by the director who is not an
employee of the payor / corporation are subject to ten percent (10%) creditable withholding tax if
his gross income for the current year do not exceed P 720,000.00 or fifteen percent (15%) if his
gross income exceeds P 720,000.00 pursuant to RR No. 30-2003. These payments fall under
“Professional Fees, talent fees, etc., for services rendered by individuals” which include under its
purview “Fees of directors who are not employees of the company paying such fees, whose duties
are confined to attendance at and participation in meetings of the board of directors.” (Section
2.57.2(A)(9), RR No. 2-98). It is also emphasized that the amount subject to the 10% or 15%
creditable withholding tax is not only confined to fees, but also per diems, allowances and any
other form of income payment made to the director.

Aside from being liable to the payment of the Income Tax imposed under Title II of the
Tax C ode, these directors who are not employees, having received fees which had been
subsequently reported in their annual Income Tax Returns as part of their gross income should
likewise be liable to pay business tax on account of such receipt of income. They fall under the
category of sellers of services under Title IV of the Tax Code who are liable to pay the 12% VAT
on their gross receipts pursuant to Section 108 thereof, or to the three percent (3%) Percentage
Tax imposed under Section 116, should they fail to meet the VAT threshold. (This paragraph
is, however, repealed by RMC 77 - 2008).

REVENUE MEMORANDUM CIRCULAR NO. 77-2008 issued on December 3, 2008 clarifies the
taxability of director’s fees received by directors who are not employees of the corporation for
Value-Added Tax (VAT) or Percentage Tax purposes as espoused under Revenue Memorandum
Circular (RMC) No. 34-2008.
 Based on the arguments cited in the Circular, it is apparent that the fees, per diems,
honoraria or allowances being given to a director of a corporation as such CANNOT be considered
as derived from an economic or commercial activity that have been pursued “in the course of
trade or business”. Rather, said director’s fees are remunerations paid in the exercise of a right
of an owner in the management of a corporation. Thus, not “in the course of trade or business”
as contemplated under Section 105 of the Tax Code. Such fees, per diems, allowances and other
income received by the director as such, are therefore exempt from the imposition of the 12%
VAT or 3% Percentage Tax, notwithstanding that the said payments are not among those
enumerated under Section 109 of the said Code.
In view thereof, the penultimate paragraph of RMC No. 34-2008 stating that directors
receiving fees, per diems, allowances, and the like, from corporations of which they are directors
but are not employees thereof “fall under the category of sellers of services under Title IV of the
Code who are liable to pay the 12% VAT on their gross receipts pursuant to Section 108 thereof,
or to the 3% Percentage Tax imposed under Section 116, should they fail to meet the VAT
threshold,” is repealed by the Circular.

REVENUE MEMORANDUM CIRCULAR NO. 39-2007 issued on June 13, 2007 clarifies the
Income Tax and Value-Added Tax (VAT) treatment of agency fees/gross receipts of security
agencies including the withholding of taxes due thereon.

The issue that comes into fore si whether or not the security guard’s salaries, which form
part of the Contract Price of the security services rendered by the Security Agency, can be treated
as gross income of the Security Agency, which will constitute as part of the taxable gross receipts
subject to VAT, whether actually or constructively received.
In view of the clear language of the law and its implementing regulations placing the
primary obligation on the Client to pay the salaries of the security guards coupled with the
requirement that the monies received by the Security Agency representing salaries shall be
earmarked and segregated for the said guards, the amount paid by the Client representing the
salaries of the security guards will not form part of the Security Agency’s gross income, and
neither will it form part of its taxable gross receipts when actually or constructively received.

The Security Agency must record as part of its gross income the Agency Fee portion of
the payment, net of the VAT thereon. Since the security guards’ salaries are tacked in as part of
the service fees, the security agency must always recognize that portion of the fees as a
LIABILITY. For this purpose, the Contract for Security Services entered into by and between the
security agency and its Client must provide for a breakdown of the amount of security services
into two components: (1) the Agency Fee, and (2) the Security Guards’ Salaries. 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, whether actually or constructively received.
The Client who is engaged in business can claim as a deduction from gross income the
total amount paid to the Security Agency, net of the VAT on the Agency Fee. It is allowed to
recognize an input tax based on the Agency Fee if the transaction is covered by a VAT Official
Receipt issued by the Security Agency. It is also required to withhold and remit the Expanded
Withholding Tax (EWT) on the Agency Fee. The portion of the expense pertaining to the security
guards salaries will be covered by a Non-VAT Acknowledgment Receipt issued by the Security
Agency.

For VAT purposes, the taxable gross receipts of the Security Agency pertains to the
amount actually or constructively received by it constituting its gross income. Since only the
amount covering the Agency Fee represents its gross income, then that portion alone of the
Contract Price, when actually or constructively received, will constitute the Security Agency’s
taxable gross receipts. This means that the amount received by the Security Agency, which is
segregated, earmarked or set aside for the salaries of the security guards, will not form part of its
gross receipts but should be recognized as a LIABILITY. Accordingly, the 12% output tax will only
be computed on the Agency Fee which shall in turn be the input tax of its Client.
Only the portion of the payment representing the Agency Fee, if covered by a VAT Official
Receipt, will entitle the VAT-registered Client to a claim of input tax credit. This means that the
amount of output tax paid by the Security Agency is the amount of input tax available to the Client.
The Client cannot claim an input tax on the salary portion of the expense (Security Services)
because it pertains to services exempt from VAT. Section 109(I) of the National Internal Revenue
Code (NIRC), as amended, specifically exempts from VAT services rendered by individuals
pursuant to an employer-employee relationship. The services of the security guards squarely fall
under this category of exempt transaction. This is because, in substance, the Client has the
principal obligation to bear the prescribed wage rates for the security guards as mentioned, and
the Security Agency will be jointly and severally liable therefore only in the event of the Client’s
failure to pay.

Consonant with the provisions of Section 113 of the NIRC, as amended, and as
implemented by Section 4.113-1 of Revenue Re gulations (RR) No. 16-2005, the Security Agency
shall issue a VAT Official Receipt for every sale, barter or exchange of services. The VAT Official
Receipt shall cover the entire amount which the Client pays to the Security Agency representing
the compens ation of its services (Agency Fee) with the indication that such amount received
includes the VAT. The VAT on the Agency Fee must always be shown as a separate item in the
VAT Official Receipt. The VAT shown on the VAT Official Receipt will constitute the output tax of
the Security Agency and in turn, the input tax of its Client.

With respect to the security guards’ salaries, which are mandated by law to be paid by the
Client through the Security Agency, the amount so paid representing salaries must be covered
by a Non-VAT Acknowledgement Receipt. This document, coupled with the notarized certification
of the EWT shall be a sufficient substantiation for the expense that will be claimed as a deduction
from gross income by the Client.
As a general rule, “all income payments which are required to be subjected to withholding
of income tax shall be subject to the corresponding withholding tax rate to be withheld by the
person having control over the payment and who, at the same time, claims the expenses.”
Insofar as the Agency Fee is concerned, the Client is constituted as the withholding agent
of the EWT following the rule above-mentioned. However, with respect to the portion of the
Contract Price representing the amount segregated and earmarked as salaries of the security
guards, the Security Agency shall be the one responsible for the withholding of the tax on
compensation income. This is so because while it is the Client who claims the payment as an
expense, it is the Security Agency that physically controls the payment to the salaries of the
Security guards. However, in order to comply with the requirement for deductibility under Section
34(K), in relation to Sections 58 and 81, all of the NIRC, as amended, the Security Agency must
furnish its Client, on or before January 31 of the year following the year of withholding, a Notarized
Certification indicating the names of the guards employed by the Client, their respective
Taxpayer’s Identification Numbers (TINs), the amount of their salaries and the amount of tax
withheld from each. This certification together with the covering Non-VAT Acknowledgment
Receipt must be kept on file by the Client as substantiation for the claim of the expense.

BIR Ruling DA(C-003) 020-2010, Jan. 29, 2010

INCOME payments to companies providing personnel, manpower and general maintenance
services are subject to two percent creditable withholding tax imposed on business agencies
pursuant to Section 2.57.2(E)(4)(g) of Revenue Regulations (RR) 2-98, as amended, based on
gross receipts which should include the agency commission plus salaries, and Social Security
System, Philhealth and Pag-ibig Fund contributions.

The rule under Revenue Memorandum Circular (RMC) 39-2007 that limits the coverage of the
two percent withholding tax to the agency fee, excluding the salaries of security guards, does not
apply to manpower service companies. Unlike in the case of security agencies wherein the
primary obligation to pay the salaries of the security guards rests on the clients, the primary
obligation to pay the salaries of the workers of other service providers rests on the service
providers themselves. [BIR Ruling DA(C-003) 020-2010, Jan. 29,2010]

In the aforementioned ruling, the Bureau of Internal Revenue (BIR) explained that there is nothing
in the RMC indicating its applicability to manpower agencies (i.e., janitorial and clerical services,
other than security agencies). Thus, the RMC cannot apply to agencies other than security
agencies. (Source: Punongbayan & Araullo)

BIR Ruling DA(C-019) 090-2010, June. 8, 2010