HOTEL SERVICE CHARGE, VAT & EWT IN THE PHILIPPINES
A comprehensive legal-tax commentary
1. What exactly is the “service charge” in hotels?
| Item | Statutory anchor | Key points |
|---|---|---|
| Definition | Art. 296 (formerly Art. 94) Labor Code, as amended by R.A. 11360 (2019) | Any amount added to the bill “for the benefit of employees.” In practice hotels, resorts and most restaurants state it as “10 % service charge.” |
| Distribution rule | Same provision | 85 % is pooled and distributed equally among all rank-and-file employees regardless of position; 15 % may be retained by management. |
| When mandatory? | Not compulsory under labor law; it is purely contractual with the guest. Once imposed, the distribution rule is mandatory. | |
| Interaction with discretionary tips | Tips given directly to staff are the staff’s property and are not pooled. |
2. Service Charge in the VAT base
Statutory basis NIRC (Tax Code) § 106(A)(1)(a) & § 108(A): VAT is levied on the “gross selling price”/“gross receipts” of goods or services. The regulations (RR 16-05, Sec. 4.108-1) and a long line of BIR rulings treat any amount the establishment is entitled to collect from the customer as part of gross receipts unless expressly excluded.
Key BIR rulings
- BIR Ruling 010-2004 and DA-646-05: Hotel/restaurant service charges form part of taxable gross receipts even if later distributed to employees.
Effect of R.A. 11360
- After 2019 the hotel keeps only 15 %. Nonetheless, the entire 100 % that the guest pays remains subject to 12 % VAT because VAT attaches at the point of sale—before netting‐out the subsequent labor-law distribution.
Threshold exemption
- Small hotels whose annual gross sales/receipts do not exceed ₱3 million (Sec. 109(1)(V), as amended by TRAIN) are VAT-exempt. They instead pay the 3 % percentage tax (Sec. 116) on the entire bill, including any service charge.
Input VAT & substantiation
- VAT paid on purchases may be credited against output VAT if the hotel is VAT-registered and invoices meet RR 16-2005 requirements.
Illustrative VAT computation
| Particulars | Amount (₱) |
|---|---|
| Room rate | 5,000.00 |
| Service charge (10 %) | 500.00 |
| VAT base | 5,500.00 |
| VAT @ 12 % | 660.00 |
| Total bill to guest | 6,160.00 |
Later: ₱425 (85 % of ₱500) is distributed to staff; ₱75 (15 %) may be retained. The VAT (₱660) is remitted in the month/quarter when the sale occurred.
3. Service Charge & Expanded Withholding Tax (EWT)
EWT issues arise at two different payment streams, frequently confused.
3.1. When the customer is a withholding agent (usually a company)
| Governing rule | Rate applied to hotel bill (*) | Section |
|---|---|---|
| RR 2-98 § 2.57.2(A) (Regular supplier of services)** | 2 % EWT on the net of VAT amount | q |
| Same, but government entity as payor | 5 % Final VAT + 1 % or 2 % EWT (depending on supplier classification) | RR 109-2020; RR 11-2018 |
*The “net of VAT” base means: Gross charge excluding the 12 % VAT; the service charge is part of that base. The withholding is creditable against the hotel’s income-tax liability.
Practical point: Many accounts-payable systems auto-apply 2 % EWT to total bill excluding VAT. Hotels should check that the service-charge portion is included; otherwise under-withholding penalties may follow (Sec. 251, NIRC).
3.2. When the hotel distributes the 85 % share to employees
- It becomes “supplementary compensation” under RR 8-2018.
- Subject to Withholding Tax on Compensation (WTC) using the graduated tax table in RR 8-2018 as modified by TRAIN (₱250 k annual exemption etc.).
- The hotel withholds and remits monthly (BIR Form 1601-C) and reports in the Alphalist of Employees.
4. Other tax nuances & common pain points
| Issue | Commentary |
|---|---|
| Timing of VAT vs. Labor distribution | VAT attaches at invoice or payment (whichever comes first), whereas labor‐law pooling/distribution may occur monthly or bi-weekly. Bookkeeping must track the timing difference to avoid VAT discrepancies. |
| Senior citizen & PWD discounts | The 20 % discount and VAT exemption for seniors/PWD under R.A. 9994 / R.A. 10754 apply on the amount net of service charge but before VAT. The service charge itself remains in the base. |
| Local taxes (e.g., LGU percentage tax in lieu of VAT for non-VAT taxpayers) | LGUs compute the business tax on the same gross sales figure used for national taxes, inclusive of service charge. |
| Input-output matching under CREATE Act incentives | Hotels operating under special economic zones (e.g., tourism enterprise zone) may be VAT zero-rated on certain transactions, but the service charge is never zero-rated because it is tied to domestic sale of accommodation/food services. |
| Accounting for the 85 % pool | Best practice: record a liability (“Service Charge Payable”) equal to 85 % upon sale; debit liability and credit “Salaries” when distributed. Management’s 15 % share is revenue. |
| Proper receipting | Official Receipts/Invoices must show: basic charge, service charge, VAT, and discounts separately (RR 16-05). Failure → ₱1,000/receipt + possible closure (Tax Code § 264, § 115). |
| Penalties for under-withholding | 25 % surcharge, 20 % interest p.a., and compromise penalties (Sec. 251–253). |
| Non-collectible service charge (e.g., waived as courtesy) | If not billed, it is not subject to VAT nor labor distribution. If billed then waived, VAT still applies unless properly voided prior to sale recording. |
| Multiple-tier charges | Some 5-star hotels impose service charge on banquets only. Those revenues follow the same VAT/EWT rules; segregated tracking is essential, especially where banquets are zero-rated for foreign conventions under BOI incentives. |
5. Sample end-to-end compliance calendar for a VAT-registered hotel
| Due date (ordinary) | Compliance task | Form |
|---|---|---|
| 10th day of following month | Withhold & remit WTC on service‐charge payouts | 1601-C |
| 10th/15th day (depending on agent) | Remit 2 % EWT withheld from B2B clients | 0619-E |
| 25th day after quarter | File 2550Q (Quarterly VAT); include service charge in sales; attach SLSP | 2550Q |
| May 15 / Nov 15 | EWT Quarterly Alphalist | QAP |
| Last day of Jan | Annual Information Return → WTC Alphalist showing service-charge components | 1604-C |
| Apr 15 | Income Tax Return; credit 2 % EWT against tax; deduct 85 % service charge as salaries expense | 1702-RT/IC |
Electronic‐filing deadlines move if date falls on weekend/holiday (RR 16-2021).
6. Open interpretative issues & risk-management tips
Is the 15 % management share still “service charge” or ordinary income? BIR has not issued a post-R.A. 11360 ruling, but prevailing practice treats it as ordinary revenue subject to VAT/Income Tax because it is effectively consideration for the service rendered by the establishment itself.
Foreign-currency transactions VAT base uses BSP reference rate on billing date (RR 13-2018). Losses/gains from FX restatement are separate income/expense for income-tax, but do not adjust VAT previously reported.
Merged or franchised properties Ensure the entity that issues the receipt is the registered taxpayer. BIR examiners often disallow input VAT if the payee’s TIN/RDO in the receipt does not match the vendor in e-FPS.
Effect of CREATE Act incentives If availing of 5 % GIE in lieu of all national/local taxes, the service charge pool is part of “gross income earned,” but a Tourism Enterprise Zone operator must still withhold WTC on distribution to employees.
7. Quick checklist for auditors & controllers
- Chart of accounts has Service Charge Payable liability.
- POS/backend correctly includes service charge in VAT base.
- OR shows separate lines for base, service charge, VAT, discounts.
- 2 % EWT is withheld on B2B payments except where payor is individual.
- 85 % share flows through payroll; WTC tables applied.
- Monthly remittances tie to general ledger.
- Senior/PWD computations retain service charge in base.
- VAT relief spreadsheets reconcile to 2550M/Q.
- Management’s 15 % booked as revenue; subject to income tax.
8. Conclusion
In Philippine hotels the service-charge mechanism sits at the intersection of labor law and tax law. For tax purposes:
- VAT — Always applies to the full service charge once collected (unless the hotel is below the ₱3 M threshold).
- EWT — 2 % on payments received from corporate clients; 5 % final VAT + 1 %/2 % EWT when the payor is a government instrumentality; and withholding-on-compensation when distributing the employees’ 85 % share.
Because each stream (VAT, EWT on receipts, WTC on payouts) has its own timing and documentary requirements, robust systems are essential to avoid cascading penalties. Hoteliers should periodically review POS settings, invoice formats and payroll processes against the latest BIR issuances and labor-law amendments, and obtain specific BIR rulings where operations involve promotional surcharges, resort memberships, or foreign convention incentives.
This article reflects the state of the law and regulations as of 7 July 2025 and is intended for general guidance only; professional advice should be obtained for specific situations.