Decision to Hire a Consultant
If you are planning to contract a consultant through a consulting agreement for services under his or her specialization, payments to such consultants are income to the latter and therefore taxable. The consultant would probably receive a monthly fee for the services. Some companies will even offer additional or generous perks, in the form of reimbursement for living expenses, yearly bonuses, additional monthly fees to cover health care, and even a stipend to pay for utilities expenses.
With these in mind, the following questions arise:
1. What are the taxes that the Consultant will be subjected to?
2. What are the taxes that the company are subject to?
3. For purposes of tax filing with the Bureau of Internal Revenue, will the company need the TIN number from the Consultant?
Taxes for the Consultant
Generally, the income or fees which the Consultant will earn or receive arising from the engagement is subject to income tax. This includes assistance that will be extended by the company. The income tax rate on the consultancy fees earned will depend on the classification of the Consultant as a taxpayer, whether an individual, a corporation, or a general professional partnership.
The fees to be paid to the Consultant may also be subject to value-added tax (“VAT”) at twelve percent (12%) if the Consultant is VAT-registered and the income earned is not one of those transactions exempt from VAT under the Law. But if it is not subject to VAT, it can still be subjected to percentage tax of one percent (1%). For VAT, this tax may be passed upon or charged to the payor, which is the company in this case, due to their nature as indirect tax.
Since the company is the payor in this consultancy agreement, the company is not the party obliged to pay the income tax on the consultancy fees to be paid. However, the company has the obligation to withhold and remit taxes from the income payments it will make to the Consultant. The withholding tax rate will again be dependent on the classification of the Consultant as a taxpayer.
For tax purposes, the type of additional perks or assistance (i.e., yearly bonuses, a monthly fee to cover living expenses, health coverage, reimbursement for utilities expenses) will not matter because they will still be considered income on the part of the Consultant.
In addition to the TIN, you may also request Official Receipts and other supporting documents if ever the consultancy fees will later be claimed as expense for deduction from gross income. But for BIR compliance purposes, you will also need to accomplish the following BIR Forms:
a. BIR Form No. 2307 – Certificate of Creditable Tax Withheld at Source;
b. BIR Form No. 1601EQ – Quarterly Remittance Return of Creditable Income Taxes Withheld (Expanded); and
c. BIR Form No. 1604E (Including the corresponding Annual Alpha list of Payees) – Annual Information Return of Creditable Income Taxes Withheld (Expanded)/ Income Payments Exempt from Withholding Tax.
Specific Taxes on the Consultant
Income Tax
The income tax that will be imposed will largely depend on the taxpayer classification of the Consultant that the company will contract with. Thus, the following classifications and sub-classifications should be noted:
Consultant is an Individual Taxpayer:
a. Filipino citizen or resident alien and his gross annual sales or receipts does not exceed Three Million Pesos (P3,000,000.00), he has the option to either be subjected to:[1]
i. Graduated Tax Rate on taxable income until 31 December 2022: or
| Not over P250,000 | 0% |
| Over P250,000 but not over P400,000 | 20% of the excess over P250,000 |
| Over P400,000 but not over P800,000 | P30,000 + 25% of the excess over P400,000 |
| Over P800,000 but not over P2,000,000 | P130,000 + 30% of the excess over P800,000 |
| Over P2,000,000 but not over P8,000,000 | P490,000 + 32% of the excess over P2,000,000 |
| Over P8,000,000 | P2,410,000 + 35% of the excess over P8,000,000 |
ii. Eight percent (8%) tax on gross sales or gross receipts and other non-operating income in excess of Two hundred fifty thousand pesos (P250,000) in lieu of the graduated income tax rates.
b. Filipino citizen or resident alien and his gross annual sales or receipts exceed Three Million Pesos (P3,000,000.00) – His taxable income will be taxed on the basis of the graduated tax rate provided above.[2]
c. Non-resident alien engaged in trade or business within the Philippines – He shall be subjected to income tax on the taxable income received from all sources within the Philippines, in the same manner as an individual citizen and a resident alien individual. A non-resident alien is deemed as engaged in trade or business in the Philippines if he stays herein for an aggregate period of more than 180 days.[3] Hence, he shall also be subjected to income tax rates as provided above.
d. Non-resident alien not engaged in trade or business within the Philippines – All his income derived or received from all sources within the Philippines shall be subject to income tax rate of Twenty five percent (25%).[4]
Consultant is a General Professional Partnership
If the Consultant is considered as a General Professional Partnership, it shall be exempt from income tax. The partners, however, shall be liable for income tax only in their separate and individual capacities.[5]
Consultant is a Corporate Taxpayer
a. Domestic Corporation[6]:
i. The income tax rate shall be twenty-five (25%) of the taxable income for each taxable year from all sources within and without the Philippines. Net taxable income shall mean the gross income less all ordinary and necessary expenses incurred in connection with the business.
ii. But if the domestic corporation has a net taxable income of less than Five Million Pesos (P5,000,000.00) and with total assets of less than One Hundred Million Pesos (P100,000,000.00), excluding land on which the particular business entity’s office, plant, and equipment are situated during the taxable year, the tax rate shall be twenty percent (20%).
iii. Instead of the two above, a minimum corporate income tax of one percent (1%) of the gross income, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed in (i) and (ii).[7]
b. Resident Foreign Corporation:
i. The income tax rate shall be twenty five percent (25%) of the taxable income derived in the preceding taxable year from all sources within the Philippines. [8]
ii. A minimum corporate income tax of one percent (1%) of the gross income, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed in (i).[9]
c. Nonresident Foreign Corporation:
A foreign corporation not engaged in trade or business in the Philippines shall pay an income tax equal to twenty five percent (25%) of the gross income received during each taxable year from all sources within the Philippines. [10]
Value-added Tax
Aside from income tax, the income of the Consultant to be contracted may also be subjected value-added tax (“VAT”).
Under the NIRC, as amended, a VAT of twelve percent (12%) is imposed on the gross receipts derived from the sale or exchange of services, including the use or lease of properties.
The “sale or exchange of services” means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration which include “the supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme”. On the other hand, “gross receipts” means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax. [11]
The consultancy agreement then is covered by the broad definition of “sale or exchange of services” under Philippine tax laws.
The consultancy fees that the Consultant will receive may then be subjected to VAT if the receipt of such is not one of those exempt transactions from VAT. Generally, when the gross annual sales and/or receipts of a taxpayer exceed Three Million Pesos (P3,000,000.00), the taxpayer’s income will be subject to VAT.[12] If the gross annual sales and/or receipts of a taxpayer does not exceed Three Million Pesos (P3,000,000.00), the taxpayer who is not a VAT-registered person shall pay a percentage tax of one percent (1%) of the gross receipts.[13]
Hence, if the annual gross receipts of the Consultant exceed Three Million Pesos (P3,000,000.00), then the consultancy fees will be subject to VAT of twelve percent (12%). Otherwise, it will be subject to percentage tax of one percent (1%).
It must be noted that VAT is an indirect tax that may be passed on to the Company by the Consultant. VAT is generally not intended to be a tax on value added, but rather as a tax on consumption. The nature of VAT as a tax on consumption is the accepted rule in our jurisdiction[14]. VAT as a tax on consumption simply means that the VAT is a tax that can be passed upon to another. That is, the VAT system enables taxpayers to offset the tax they have paid on their own purchases of goods and services against the tax they charge on their sale of goods and services.[15] As such, consumption for VAT purposes means the scheme that can be passed upon to another. Hence, while the Consultant may be subject to VAT, this tax may be passed upon to the Company as part of the total payment it will make. The same principle applies to percentage tax.
Withholding Tax on the Income Payments
Aside from the VAT that will be passed upon to the company, it will also have the obligation to withhold taxes from the income payments it will make to the Consultant. This is required by the NIRC, as amended, and implemented by Revenue Regulations issued by the BIR. In this regard, the Company is considered as withholding agents of the BIR for this purpose.[16]
The reason for this is that any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the BIR[17]. As such, in order for the income payments to be allowed by the BIR to be claimed by the Company as deduction from its own gross income, it should withhold the prescribed withholding tax.
On the other hand, the Consultant may credit the taxes withheld on the income payments, from the total income tax due when it will file its income tax return.[18]
As for the rate to be withheld by the company, this is again dependent on the taxpayer classification of the Consultant.
Professional Fees
For the rates below to apply, the Consultant should be contracted due to his profession, that is, his profession requires government licensure examination regulated by the Professional Regulations Commission or for lawyers, by the Supreme Court of the Philippines. This is also on the assumption that the Consultant is not an employee of the company. The rate on gross professional fees or any other form of remuneration for the services rendered shall be the following:
a. Individual payee[19] (Except nonresident alien not engaged in trade or business in the Philippines):
i. If gross income for the current year did not exceed P3 Million ———– Five percent (5%)
ii. If gross income for the current is more than P3 Million ———————-Ten percent (10%)
b. Nonresident alien individual payee who is not engaged in trade or business in the Philippines:
i. A final withholding tax of twenty five (25%) of the gross amount of income derived from all sources within the Philippines. [20]
b. Non-individual payee[21] (Domestic and Resident Foreign Corporation or Commercial Partnership):
i. If gross income for the current year did not exceed P720,000—————-Ten percent (10%)
ii. If gross income for the year exceeds P720,000——————————-Fifteen percent (15%)
c. Nonresident foreign corporation:
i. A final withholding tax of twenty five (25%) of the gross amount of income derived from all sources within the Philippines.[22]
Company is Top Withholding Agent
The discussion for this section is on the assumption that the Consultant is not contracted due to his profession.
The BIR defines top withholding agents as those taxpayers whose gross sales/receipts or gross purchases or claimed deductible itemized expenses, as the case may be, amounted to Twelve Million Pesos (P12,000,000.00) during the preceding taxable year.[23]
As such, if the company’s gross sales/receipts or gross purchases or claimed deductible itemized expenses for taxable year 2021 amounted to Twelve Million Pesos (P12,000,000.), then the company may be considered as a top withholding agent. With that, the rate of tax to be withheld by the company from the income payments to be made to the Consultant will be two percent (2%), considering that the latter is deemed a supplier of services.[24]
Contractor is a General Professional Partnership
When the contractor is a general professional partnership, the company is not required to withhold tax on the income payments. This is because a general professional partnership is not subject to income tax. The partners of the general professional partnership shall be liable for income tax only in their separate and individual capacities. Each of the partners shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.[25] Hence, income exempt from income tax is consequently exempt from withholding tax.
Perks, Benefits and other forms of Assistance to the Consultant
Gross income is defined as all income derived from whatever source, including (but not limited to) compensation for services; the conduct of trade or business or the exercise of a profession; dealings in property; interests; rents; royalties; dividends; annuities; prizes and winnings; pensions; and a partner’s distributive share in the net income of a general professional partnership.[26]
The definition of gross income is so broad and encompassing to include all the assistance mentioned above that will be extended to the Consultant. After all, if these perks, benefits and assistance will not be provided by the company to Consultant, the latter will have to spend for the same. Whether the assistance will be included in the total fee or not, the treatment is just the same, that is they form part of the gross income of the Consultant, hence, taxable income.
About Nicolas and De Vega Law Offices
If you need assistance in Philippine tax law, or have any concerns in local or international taxation, including tax assessment or collection disputes, tax refunds, or tax cases involving Philippine taxes, we can help you. Nicolas and de Vega Law Offices is a full-service law firm in the Philippines. You may visit us at the 16th Flr., Suite 1607 AIC Burgundy Empire Tower, ADB Ave., Ortigas Center, 1605 Pasig City, Metro Manila, Philippines. You may also call us at +632 84706126, +632 84706130, +632 84016392 or e-mail us at info@ndvlaw.com. Visit our website www.ndvlaw.com.
[1] Section 24(A)(2), National Internal Revenue Code (“NIRC”), as amended.
[2] Section 24(A)(2), NIRC, as amended.
[3] Section 25(A)(1), NIRC, as amended.
[4] Section 25(B), NIRC, as amended.
[5] Section 26, NIRC, as amended.
[6] Section 27(A), NIRC, as amended.
[7] Section 27(E)(1), NIRC, as amended.
[8] Section 28(A)(1), NIRC, as amended.
[9] Section 28(A)(2), NIRC, as amended.
[10] Section 28(B), NIRC, as amended.
[11] Section 108(A), NIRC, as amended.
[12] Section 109(CC), NIRC, as amended.
[13] Revenue Regulations (“RR”) No. 16-2005, as amended.
[14] CIR vs. Seagate Technology (Philippines), G.R. No. 153866, February 11, 2005; ABAKADA Guro Party List v. Ermita, G.R. Nos. 168056, et al., September 1, 2005; Panasonic Communications Imaging Corporation v. CIR, 625 Phil. 631; Team Energy Corporation v. CIR, G.R. Nos. 197663 & 197770, March 14, 2018
[15] CIR v. Seagate Technology (Philippines), G.R. No. 153866, February 11, 2005; Abakada Party List v. Ermita, G.R. Nos. 168056, et. al., September 1, 2005.
[16] Section 2.57.3 of RR No. 2-98, as amended.
[17] Section 34(K), NIRC, as amended, and as implemented by Section 2.58 of RR No. 2-98, as amended.
[18] Section 2.57(A) of RR No. 2-98, as amended.
[19] Section 2.57.2(A) of RR No. 2-98, as amended.
[20] Section 2.57.1(C)(1) of RR No. 2-98, as amended.
[21] Section 2.57.2(A) of RR No. 2-98, as amended.
[22] Section 2.57.1(F) of RR No. 2-98, as amended.
[23] Section 2.57.2(I) of RR No. 2-98, as amended.
[24] Supra.
[25] Section 26, NIRC, as amended.
[26] Section 32, NIRC, as amended; Association of International Shipping Lines, Inc., APL Co. PTE LTD., and Maersk-Filipinas, Inc. vs. Secretary of Finance and Commissioner of Internal Revenue, G.R. No. 222239, 15 January 2020; Commissioner of Internal Revenue vs. Philippine Airlines, Inc., G.R. No. 160528, 09 October 2006.
