Revisiting the tax rules on security agencies

Revisiting the tax rules on security agencies

Lately, there were apprehensions from operators of security agencies due to left and right tax investigations and criminal cases being filed by the BIR against members of the industry under its Run After Tax Evaders (RATE) program.  A top revenue official explained in one news article that BIR is not specifically targeting security agencies.  It was pointed out that the tax issues, specifically VAT issues, involving security agencies were due to noncompliance with existing tax rules and regulations. 

As early as in 2007, the BIR has already provided specific rules on the tax treatment of security agencies through Revenue Memorandum Circular (RMC) No. 39-07.  The RMC clarified the treatment of gross receipts or gross income of security agencies  for purposes of computing the 12% VAT and 2% expanded withholding tax.  As such, it is interesting to revisit what BIR tax regulations required of security agencies.

Security agencies derive their revenues from agency fees billed to their clients.  Though contracts for security services include all costs incurred by the agency including the salaries of security guards, only the agency fee is considered their gross income or gross receipts for income tax and VAT purposes.  The RMC, however, requires, that the  VAT official receipt is issued only for the agency fee.  The salaries of the guards, since these are earmarked and segregated from the monies received from the clients of the security agency, must be supported with non-VAT acknowledgment receipt. Accordingly, salaries of security guards are not subject to the income tax and VAT on the security agency if the proper invoicing is followed.

It seems that the rules are quite straightforward.  Hence, where do the VAT issues come from?

According to the BIR, security agencies continue to ignore the invoicing requirement.  Most of them continue to issue the VAT official receipt on the entire amount it receives from clients.  Hence, under the rules, these shall be treated as gross income or gross receipts of the security agency and shall be subject to the applicable income tax and VAT, as the case may be.

It is further noted that under the said RMC, it is required that the contract for security services entered into 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.

 

Moreover, the journal entry recording requirement in the books of security agency poses also some inherent tax issues. The RMC requires that salaries of the guards must be recognized and recorded in the books of the security agency as liability.  The RMC suggest that, in the books, this may be recorded as “due to security guards”.

We know that prior to the RMC, the amount billed (i.e., the agency fee and guards’ salaries) to client by security agency was the basis for purposes of VAT and withholding tax.  Such accounting entry practice may have continued even after the issuance of the RMC.

To be able to enjoy the privileges under the RMC, security agencies should at least follow the compliance requirements.  They can’t have their cake and eat it too, as the saying goes. If they cannot comply, they cannot be entitled to the lesser withholding tax and  VAT.     

The tax rules for security agencies are different from those applicable to other business agencies.  In fact, their treatment has become the envy of other similarly situated businesses.  In the past, other business agencies such as manpower agencies have attempted to secure rulings for similar tax treatment.  Those which were granted were subsequently revoked, pointing out the absence of legal basis.

Other sectors that were granted the same treatment are the brokers and freight forwarders which were issued revenue issuances specifically for the sector.

Their situations look pretty much the same.  The same principles and business models are being applied such as in the case of labor contracting or janitorial services.  There is a service fee portion earmarked for the payment of the salaries of employees who are sent to perform the services required by its respective clients.  That’s why other business agencies are asking why they can’t adopt such tax treatment similar to the security agencies to avoid any confusion and discrimination? This leaves me with another question, under the principles of justice and equity – is there really a difference at all?