General information for Philippine tax and labor law context. Not legal advice.

1) The issue in one sentence

When a restaurant adds a mandatory service charge to a bill, corporate/government customers that are withholding agents often ask: Should EWT be computed on the service charge (like the food amount), or should it be excluded because it is ultimately distributed to employees?

The answer depends on (a) how “service charge” is legally characterized (labor law and tax law), (b) who the payor is (withholding agent or not), and (c) how the transaction is documented and treated (VAT/percentage tax invoicing and accounting).

2) Quick glossary (Philippine context)

Service charge (restaurants, hotels, similar establishments)

A mandatory amount (commonly 10%, but not fixed by tax law) added to a customer’s bill and collected by the establishment, governed primarily by labor law on how it must be distributed to covered employees.

Under current labor policy (notably RA 11360, amending the Labor Code provision on service charges), service charges collected by covered establishments are generally for the benefit of covered employees and are distributed in full to them, subject to implementing rules.

Tip / gratuity

A voluntary amount given by the customer. This matters because voluntary tips are usually treated differently from mandatory service charges for tax base purposes.

Expanded Withholding Tax (EWT)

A creditable withholding tax on certain income payments (NIRC Sec. 57(B), implemented largely through Revenue Regulations No. 2-98, as amended). It is withheld by the payor if the payor is a withholding agent, remitted to the BIR, and the payee claims it as a tax credit (typically supported by BIR Form 2307).

3) The legal framework you must keep straight

A. Labor law (who “owns” the service charge economically)

Labor law answers: Who is entitled to the service charge? For covered establishments, the service charge is intended to be distributed to covered employees (generally excluding managerial employees), and rules apply on distribution and what happens if the service charge is removed.

B. Tax law (what the payor is paying for; what is “income payment”)

Tax law answers:

Is the service charge part of the consideration paid to the restaurant for purposes of VAT/percentage tax and gross receipts?
Is the service charge an income payment to the restaurant that is within the EWT base, or is it a pass-through collected for employees (and therefore not the restaurant’s income)?

These do not always align neatly, which is why this topic causes disputes.

4) How service charge is usually treated across Philippine taxes (big picture)

4.1 VAT / percentage tax treatment (restaurant side)

Mandatory service charge shown on the bill is commonly treated as part of the restaurant’s gross receipts for indirect tax purposes because it is charged to the customer as part of the transaction. Practically:

If the restaurant is VAT-registered, the service charge is often included in the VAT base (unless it is structured and documented as a true pass-through not forming part of consideration—rare in practice).
If non-VAT, it can form part of the base for the applicable percentage tax.

Voluntary tips, especially those not coursed through the restaurant’s billing system, are often treated differently because they are not part of the consideration demanded by the seller.

4.2 Income tax treatment (restaurant and employees)

There are two taxpayers in play:

(A) Restaurant (business income tax):

If the restaurant recognizes service charge as revenue, it is part of gross receipts; the later distribution to employees is typically treated as a deductible compensation expense, assuming substantiation and proper payroll treatment.
If the restaurant treats service charge as a liability/amount held for employees (a “trust” or pass-through approach), it may argue it is not income to the restaurant in the first place (but see EWT risk discussion below).

(B) Employees (compensation income tax):

Amounts distributed to employees as service charge are generally treated as compensation income (or compensation-like income) and are typically subject to withholding tax on compensation (payroll withholding), depending on the employee’s tax status and thresholds.
Important nuance: minimum wage earners have special exemptions on certain items; service charge treatment must be evaluated under the current rules on taxable compensation and exemptions.

5) EWT basics relevant to restaurants

5.1 When EWT applies at all

EWT applies only if the payor is a withholding agent required to withhold on that type of payment.

Typical withholding agents that encounter restaurants:

Government agencies/GOCCs buying meals/catering for official events
Top withholding agents (TWAs) designated by BIR
Many corporations engaged in business that are required under regulations to withhold on certain supplier payments

Ordinary individual diners are usually not withholding agents—so EWT is normally not a concern for everyday retail customers.

5.2 Typical EWT categorization for restaurant transactions

Corporate/government payments to restaurants commonly get treated as:

Payments for services (e.g., catering, event/banquet service, food service), often under the “contractors/other services” buckets; or
Purchases of goods (less common in dine-in framing, but sometimes argued for boxed products or purely sale-of-goods setups)

Because EWT rates vary by category and by the payor’s status, classification should be checked against the current withholding tax table under the implementing regulations.

5.3 General base rule: VAT is usually excluded if separately stated

As a common compliance rule in Philippine withholding practice:

If VAT is separately billed/shown, EWT is generally computed on the amount net of VAT (because VAT is not income of the seller; it is a tax collected).
If VAT is not separately shown, payors often compute a “net-of-VAT” base using the applicable formula—but this increases disputes, so proper invoicing matters.

6) The core question: Is the service charge part of the EWT base?

There are two competing ways to analyze this. In practice, many organizations adopt the more conservative approach unless supported by clear guidance or documentation.

Approach 1 (Most conservative / most common in audits): Include service charge in EWT base

Reasoning:

The payor is making a single payment to the restaurant based on the restaurant’s invoice/receipt.
The service charge is presented as part of the billed amount the customer must pay to obtain the service.
EWT is imposed on income payments to the payee; from the payor’s perspective, the payee is the restaurant, and the billed charges are consideration for what the restaurant supplied.
The restaurant’s later distribution to employees is an internal allocation/expense, not something that changes the fact that the payor paid the restaurant.

Practical effect:

Payor withholds EWT on (meal + service charge), net of VAT if VAT is separately stated.
Restaurant receives BIR Form 2307 and claims EWT as a credit.
Restaurant then distributes service charges to employees through payroll, applying withholding on compensation rules where applicable.

Why payors like this approach: It minimizes the payor’s risk of being assessed for failure to withhold (plus surcharge, interest, penalties) and avoids debates about whether service charge is “income” vs “trust funds.”

Approach 2 (Pass-through theory): Exclude service charge from EWT base

Reasoning:

Under labor law, the service charge is for covered employees and is meant to be distributed to them.
If the restaurant has no beneficial ownership and merely collects the amount in trust for employees, then that portion arguably is not income to the restaurant.
EWT applies to income payments. A true pass-through collected for employees may be argued to fall outside “income payment to the restaurant.”

What makes (or breaks) this approach in real life: To credibly treat service charge as not part of the restaurant’s income payment, the restaurant usually needs strong consistency across:

Billing: clear separation of service charge from sales price; transparent disclosure that service charge is collected for employees.
Accounting: service charge booked as a liability/payable to employees, not revenue.
Payroll: complete distribution to employees with proper payroll reporting and withholding on compensation compliance.
Tax consistency: reconcilable treatment for VAT/percentage tax and income tax reporting (this is where conflicts often arise).

Main risk: Even if the restaurant treats it as pass-through, the BIR may still view the service charge billed to customers as part of gross receipts/consideration—making the payor’s exclusion vulnerable in a withholding tax audit unless there is specific authoritative support for exclusion.

A practical reality check

Payor liability is direct: In EWT, the party at risk for under-withholding is the withholding agent (payor).
Because of that, many corporate/government payors will include service charge in the EWT base unless the restaurant can provide very strong justification (and, ideally, formal guidance supporting the exclusion).

7) Computation examples (common structures)

Example 1: VAT-registered restaurant; payor is a withholding agent; EWT includes service charge

Meal: ₱1,000 Service charge (10%): ₱100 VAT 12% (if applied on ₱1,100): ₱132 Total bill: ₱1,232

If EWT category is “services” at 2% (illustrative):

EWT base: ₱1,100 (net of VAT; includes service charge)
EWT: ₱22 Payor remits ₱22 to BIR and pays restaurant ₱1,210.

Example 2: Voluntary tip not billed

Meal: ₱1,000 + VAT as applicable Customer leaves ₱100 cash tip directly to staff (not billed; not receipted by restaurant)

EWT (if any) generally applies only to the billed amount paid to the restaurant, not the cash tip paid directly to employees.

8) Special scenarios that commonly change the analysis

8.1 Dine-in vs catering/banquet vs corporate events

Catering/banquet arrangements often look more clearly like service contracts, which strengthens EWT applicability on the full contract price. If service charge is embedded as part of the contract price, payors are more likely to include it in the base.

8.2 “Service fee” vs “service charge”

Restaurants (and platforms) sometimes label charges as:

service charge (labor-law concept),
service fee (commercial pricing),
convenience fee,
delivery fee,
packaging fee.

The label is not controlling; the key question is what the fee is for and who ultimately earns it. Many of these fees are simply additional consideration to the vendor/platform and are typically included in the withholding base if paid to a withholding-agent payee.

8.3 Third-party delivery platforms / marketplaces

If a corporate customer pays through a platform, determine:

Who is the seller on the invoice (restaurant or platform)?
Who collects the service-related fees?
Whether the platform is acting as an agent or as a principal (reseller).

This affects who is the payee for EWT and which amounts are “income payments” to that payee.

8.4 Government purchases: interaction with withholding VAT

Government payors often apply both:

EWT (creditable withholding), and
withholding VAT rules applicable to government purchases (a separate regime).

Even when the topic is “EWT,” mismatches often arise because suppliers reconcile withholding VAT certificates and 2307 credits differently.

9) Documentation and compliance (what gets examined in audits)

For the withholding agent (customer/payor)

Key controls:

Determine whether the payor is a required withholding agent for this payment.
Identify correct EWT category and rate based on the current withholding table.
Compute base properly (commonly net of VAT if separately stated).
Withhold and remit on time; issue BIR Form 2307 to the restaurant.
Ensure the expense is supported by proper invoices/receipts and the withholding is properly reported.

Audit risk for payor: If the BIR treats service charge as part of the supplier’s taxable income payment, the payor can be assessed for under-withholding if it excluded service charge.

For the restaurant (supplier)

Key controls:

Invoice/receipt presentation: clear line items (meal, service charge, VAT).
Clear policy and payroll mechanism for distributing service charges to employees under labor rules.
Correct payroll withholding treatment (if applicable) and reporting to employees.
Reconciliation: EWT credits (2307) vs reported income and expenses.
If arguing pass-through: consistent accounting treatment as a liability and strong supporting documentation.

Audit risk for restaurant: Inconsistency between:

VAT base (gross receipts),
income tax reporting,
EWT credits received,
payroll reporting of service charge distributions.

10) Practical positions seen in the market (what companies actually do)

Common corporate stance (risk-managed)

Withhold EWT on the full vatable/receipted amount excluding VAT, including the service charge, because it is part of what was paid to the restaurant per invoice.
Treat any “it’s for employees” argument as something the restaurant must resolve with its own payroll/tax compliance, not something that changes the payor’s EWT duty.

Common restaurant request

“Please exclude the service charge from EWT because we distribute it to employees.”

This request is common, but whether a payor can safely accept it depends on the payor’s risk appetite and the restaurant’s ability to support a pass-through characterization consistently across documentation and tax reporting.

11) A decision guide (Philippine compliance lens)

Step 1: Is the customer a withholding agent?

If no → EWT generally not relevant.
If yes → go to Step 2.

Step 2: Is the “service charge” mandatory and billed by the restaurant?

If no (pure tip) → usually not part of EWT base.
If yes → go to Step 3.

Step 3: Does the payor have strong support to treat it as pass-through?

Support typically means: clear invoice separation, consistent liability accounting, proof of full distribution, and a defensible tax position consistent with indirect tax and income tax reporting.

If no → conservative approach is include service charge in EWT base (net of VAT if separately stated).
If yes → exclusion can be argued, but carries audit risk unless backed by authoritative guidance.

12) Key takeaways

Service charge is primarily a labor-law construct, but it creates tax consequences for both the restaurant and employees.
EWT applies only when the payor is a withholding agent. Ordinary diners usually don’t withhold.
The central technical question is whether service charge is an income payment to the restaurant (include in EWT base) or a pass-through for employees (exclude).
In practice, many payors include service charge in the EWT base to reduce exposure, especially when the service charge is billed as part of the restaurant’s official receipt/invoice.
Restaurants that want service charge excluded from EWT need high-consistency documentation and accounting—and should expect payors to be cautious because the payor bears the under-withholding risk.