REVENUE MEMORANDUM ORDER NO.

3-2009 By: Bahina, Eufinel Balili

Issued on: January 23, 2009 Bisnar, Katreena Mercado

1. What is it about?
“Oplan Kandado” is an initiative involving the strengthening of the Bureau’s imposition of prescribed administrative
sanctions for non-compliance with such essential requirements as: the issuance of receipts, filing of returns,
declaration of taxable transactions, taxpayer registration, and paying the correct amount of taxes as mandated by
the norms/standards of their particular industry or line of business.

2. Why is it important?
 Amends and consolidates the guidelines in the conduct of surveillance and stock-taking activities, and
implements the administrative sanction of suspension and temporary closure of business;
 Prescribes reporting requirements on surveillance activities and the implementation of the administrative
sanctions of suspension and temporary closure of business;
 Provides for immediate imposition of penalties for offenses committed, in order to deter further commission
thereof; and
 Maximizes the degree of voluntary tax compliance, thereby increasing revenue collections.

3. To whom is it directed against?

“Oplan Kandado” targets non-compliant taxpayers, who, as a result of surveillance/stocktaking activities, have been
found to have committed the violations enumerated in Item (1), Section IV of RMO 3-2009 and who, notwithstanding
the issuance of several notices of violations, continue to refuse to comply with the requirements provided under
existing rules and regulations.

4. Under what conditions, then, can a business establishment be padlocked by the BIR?
Specifically, the only grounds for the temporary closure of business are:
A. Failure to issue receipts or invoices by a VAT-registered or registrable taxpayer;
B. Failure to file a VAT return;
C. Understatement of taxable sales or receipts by 30% or more of the correct amount thereof in the case of a
VAT-registered or registrable taxpayer; or
D. Failure to register as a VAT taxpayer.

5. How is “Oplan Kandado” done?

1. Through covert and overt surveillance (required to be covered by duly executed Mission Orders) - the BIR
can observe the volume and magnitude of business transactions of an establishment, as well as its
procedure in documenting such transactions through invoices or official receipts. Revenue officers
conducting covert surveillance may pose as customers or mere onlookers. Third party information may also
be gathered in order to check if the taxpayer is correctly reporting its sales. After gathering the preliminary
data, an overt surveillance is conducted, whereby the revenue officers request for the books of accounts,
invoicing records, and inspect cash register machines where applicable, in order to determine the accuracy
of information disclosed in the VAT returns of the taxpayer. Overt surveillance can take 10-30 days and may
even be extended.

2. Report preparation - Based on findings from the surveillance operations, the BIR prepares a report, which
may or may not recommend the closure of the business establishment. This report is then presented to the
taxpayer, who is given 48 hours to explain, in a notarized document, why the business should not be closed
temporarily. Upon the taxpayer’s submission of the explanation, or if none is submitted within 48 hours, the
BIR will decide whether or not to terminate the case.

3. Service of VAT Compliance Notice - In the event that the BIR decides to pursue the case, a five-day VAT
Compliance Notice (VCN) is served upon the taxpayer, providing details on what he or she needs to submit
and how much in assessed taxes needs to be paid.

4. Taxpayer submits response - To refute these findings, the taxpayer should submit a response within two
days from receiving the VCN. Otherwise, the taxpayer must comply and pay the taxes assessed within the
five-day period.

5. Non-action by the taxpayer, preparation and execution of the OPLAN KANDADO - If the taxpayer is unable
to do either, the BIR will prepare and execute the Closure Order, including physically sealing the entrance to
the establishment with padlocks and putting the BIR signage by the entrance. This may then get unwanted
publicity when the closure is picked-up and covered by the media.

For at least five days, the closure will be in force until the taxpayer rectifies the alleged violations, and only then can
he or she resume operations.

In some cases, immediate or partial compliance may be considered sufficient basis to lift the closure. In the process,
the taxpayer can still amend his or her returns for other taxes, and may still be audited for other taxes in the future.

Once the Closure Order is lifted, the BIR will continue to monitor tax payments. If the taxpayer commits the same
violations previously penalized, the BIR can initiate proceedings to impose administrative and criminal penalties under
the Run After Tax Evaders program.

References: RMO 3-2009 and Oplan Kandado: Are drastic measures justifiable? By Vicki A Ballesteros (January 18, 2010)
REVENUE MEMORANDUM CIRCULAR NO. 34-2008 By: Arbiol, Kress Ryan
Date Issued: April 18, 2018

1. What is RMC 34-2008 for?

It clarifies the tax treatment of director’s fees for Income Tax and business tax purposes.

2. Under the Tax Code…

Section 79, in relation to Section 24(A), both of Tax Code, as amended, director’s fees are subject to the withholding
tax on wages.

2.1. When would it be taxable as withholding tax on wages?

The said tax treatment applies whenever it is established that there is employer-employee relationship between
the director and the corporation (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).

2.2. These fees which are considered as compensation income, are these subject to VAT?
NO. Accordingly, the director’s fees received by employees are exempt from VAT under Section 109 of the Tax
Code.

3. What happens if these fees are paid to directors who are not considered as employees?
Such fees are not treated as compensation income, 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:

(1) ten percent (10%) CWT1 if his gross income for the current year does not exceed P 720,000.00; or
(2) fifteen percent (15%) if his gross income exceeds P 720,000.00 pursuant to RR No. 30-2003.

It is also emphasized that the amount subject to the 10% or 15% CWT is not only confined to fees, but also per
diems, allowances and any other form of income payment made to the director.

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).

4. If these fees are paid to directors who are not considered as employees, would these fees be then
subject to VAT?
YES. Aside from being liable to the payment of the Income Tax, 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:

(1) The 12% VAT on their gross receipts pursuant to Section 108 thereof; or
(2) The three percent (3%) Percentage Tax imposed under Section 116, should they fail to meet the VAT threshold.

1
Creditable Withholding Tax
REVENUE MEMORANDUM CIRCULAR NO. 77-2008 By: Agero, Nikki Rose Laraga
Date issued: December 3, 2008

This circular 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 purpose as espoused under RMC No. 34-2008.

In accordance to the RMC No. 77-2008, the director’s fees who are not employees of the corporation are 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, because of the following reasons:

a) The fees, per diems, honoraria or allowances being given to a director who are not employees of a
corporation cannot be considered as derived from an economic or commercial activity that have been
pursued “in the course of trade or business”;

b) Director fees are remunerations paid in the exercise of a right of an owner in the management of a
corporation;

c) The section of the Corporation Code limits the term of the elected director for only 1 year until his successor
is elected, thereby, such services cannot be considered as one of those undertaken on a going-concern
basis as expected in the regular conduct of selling goods and/or services;

d) The remuneration is fixed and subject to the ceiling prescribed by the Corporation Code; and

e) The director is generally precluded from entering into a contract with the corporation subject to the
conditions provided for under Section 32 of the Corporation Code.
REVENUE MEMORANDUM CIRCULAR NO. 39-2007 By: Avergonzado, Lucio Jr.
Date Issued: January 22, 2007

1. What is the purpose of this circular?

RMC No. 39-2007 seeks to clarify the Income tax and VAT treatment of Agency Fees/Gross Receipts of
Security Agencies

2. What do you mean by Agency Fees?

Simply put, this is the amount paid by the Client to the Security Agency as payment for its service of
providing security of its establishment. Agency fee is different from the salary of the guard being employed
by the Security Agency.

For example: Let us supposed that Barcelon has a Security Agency. The name is Barcelonica (combination
of Barcelon and Ludica) Security Agency. One of its clients is SM. Here, the Contract For Security Services
between SM and Barcelonica as regards the amount of services to be paid by SM should have two
components: (1) The Agency Fee; and (2) the Salaries of Security Guards.

3. So what’s the connection of question no. 2 to the RMC 39-2007?

Before, it has been assumed that the tax treatment of gross receipts by security agencies was already clear.
That is, the full contract price for security services is subject to VAT, income tax, and withholding tax. This
means that both the agency fee and the security guard’s salary are VATABLE. But RMC 39- 2007 has
completely changed this rule.

The rule now is that, only the Agency Fee liable for VAT. This is based on the premise that in order for an
amount received to form part of the gross receipts for VAT or income tax, it must constitute the gross
income of the taxpayer when received or earned. Be it noted that the Security guard’s salary will never form
part of the gross income of the security agency.

4. Can you explain why a salary of the security guard will not form part of the Security Agency’s
gross income? Isn’t it that the Client will pay to the Security agency the entire contract price of
security services, including the salary of its security guard?
Yes it is true that the Security Agency will receive the entire contract price including the salary of its security
guard. But portion of the contract payments is already earmarked as salaries of security guards and the
security agency is not free to use it in any other manner. Meaning to say, the agency is only a trustee to the
fund which is already earmarked as salaries of the security guards. This is provided under RA No. 5487’s
Implementing Rules and Regulations

Simply put, salaries of the security guards will not form part of the Agency’s gross income. Instead, it’s a
liability.

5. Summarize the VAT treatment of Security Services.

It can be summarized in this wise:

The 12% VAT of the security agency will only be computed on the agency fee. Consequently, the client
can claim the input tax on the agency fee as credit against its output VAT, provided that it is supported with
a VAT official receipt.

The portion of the contract price representing the salaries of the security guards shall be exempt from VAT
being payments for services rendered pursuant to an employer-employee relationship as provided under
Section 109 of the Tax Code.

The security agency shall issue a VAT Official Receipt only for the amount representing the agency fee. A
non-VAT Acknowledgement Receipt shall be issued for the amount representing the security guards’
salaries.
BIR RULING [DA-(C-003) 020-10] By: Barcelon, Clark
January 29, 2010
RR No. 17-2003; BIR Ruling No. 049-85 M Power Service Solutions, Inc.

Facts:
This is a request for clarification on whether M Power Service Solutions, Inc is covered under Revenue Memorandum Circular
(RMC) No. 39-2007. M Power Service Solutions, Inc. is engaged in providing qualified and properly trained personnel to
address manpower and general maintenance needs of its clients, more specifically, janitorial and similar needs.

Issue:
Whether or not RMC No. 39-2007 covers to M Power Service Solutions, Inc.

Ruling:
No, it is not covered by the RMC No. 39-2007. Income payments to companies providing personnel, manpower and general
maintenance services are subject to 2% CWT imposed on business agencies pursuant to Section 2.57.2(E)(4)(g) of RR 02-98
based on gross receipts, which should include the agency commission plus salaries and the contributions (SSS, PhilHealth, and
Pag-IBIG). The rule under RMC 39-2007 that limits the coverage of the 2% CWT 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. The 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.
BIR RULING [DA (C-019) 090-10] By: Bonsucan, Arjam

Facts:
Top Rate Construction and General Services Incorporated (Top Rate for brevity), a corporation engage in the business as a
contractor for construction work and providing general services to the public covering janitorial and messengerial work,
requested that RMC 39-2007 be applicable to independent contractors like Top Rate insofar as the treatment of agency
fees/gross receipts is concerned.

Ruling:
It is basic in statutory construction that when the words of a statute are clear and unambiguous, they must be held to mean
what they plainly express. Statutes creating a new liability increasing an existing liability shall be construed strictly. Tax laws
operate to impose burdens on the public or to restrict enjoyment of their property. Thus, in the interpretation of such
statutes it is the established rule not to extend their provisions by implication, beyond the clear import of the language
employed, or to enlarge their scope as to include matters not specifically pointed out.

There is nothing in the context of RMC 39-2007 which would suggest to have the RMC applicable to manpower agencies
OTHER THAN THE SECURITY AGENCIES. Under the revised rules and regulations implemented RA 5487, the primary
obligation to pay the salaries of the security guards was placed to the clients. It is required that the monies received by the
security agency representing salaries shall be earmarked for the security guard and shall not form part of the agency’s gross
income. On such basis, the security agency is placed on a tax situation different from other service providers

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