Is Service Charge from Lessors Subject to Expanded Withholding Tax (EWT)?
In the Philippine leasing industry, a common point of contention between lessors and lessees is the tax treatment of "service charges"—those additional fees billed alongside the basic rent to cover common area maintenance (CAM), security, utilities, and administrative costs.
To determine whether these charges are subject to Expanded Withholding Tax (EWT), one must look at the nature of the payment and the prevailing regulations issued by the Bureau of Internal Revenue (BIR).
The Nature of the Payment: Gross Income
Under the National Internal Revenue Code (NIRC), "gross income" is defined broadly to include all income derived from whatever source. For a lessor, service charges represent an inflow of economic benefit intended to defray the costs of maintaining the property.
The BIR generally views these charges as part of the "gross rentals" or "gross payments" made by the lessee to the lessor. Because these payments are incidental to the lease agreement and constitute income to the lessor, they fall within the ambit of the withholding tax system.
Applicable EWT Rates
The EWT is a system where the payor (lessee) is constituted as the withholding agent to deduct a certain percentage from the payment and remit it to the BIR. The rates for lease-related payments are governed by Revenue Regulations (RR) No. 2-98, as amended:
- Rentals on Real Property: 5%
- Rentals on Personal Property: 5%
If the service charge is billed by the lessor as part of the lease consideration, it is typically subjected to the 5% EWT rate applicable to rentals.
Reimbursable Expenses vs. Service Income
The primary legal distinction lies in whether the charge is a pure reimbursement or a service fee.
- Direct Reimbursement (Out-of-Pocket): If the lessor pays a third-party utility company (like Meralco or Maynilad) on behalf of the lessee and bills the lessee for the exact amount without any markup, and the original receipt is in the name of the lessee, this may be treated as a reimbursement. In strict accounting, pure reimbursements are not income and may not be subject to EWT.
- Service Charges/CAM: Most CAM charges are not exact reimbursements. They are estimated or fixed fees charged by the lessor to provide a suite of services. The BIR's position, supported by various BIR Rulings (e.g., BIR Ruling No. DA-148-07), is that these charges form part of the "gross receipts" of the lessor.
The "Gross Receipts" Doctrine
The BIR consistently maintains that for purposes of withholding tax, the "gross rental" includes not just the base rent but also all other payments which the lessee is required to pay to the lessor. This includes:
- Common Area Maintenance (CAM) fees.
- Air-conditioning charges.
- Security and janitorial fees billed by the lessor.
Even if these items are invoiced separately from the "basic rent," they are considered necessary payments for the use or possession of the property. Therefore, the lessee is required to withhold 5% on the total amount (excluding VAT).
VAT Treatment
While EWT is 5%, it is important to note that these service charges are also subject to 12% Value-Added Tax (VAT), provided the lessor is a VAT-registered entity. The 5% EWT is calculated based on the gross amount excluding the VAT.
| Component | Treatment |
|---|---|
| Base Rent | 5% EWT |
| Service Charge / CAM | 5% EWT |
| Utility (billed by Lessor) | 5% EWT |
| VAT (12%) | No EWT (EWT is based on the net of VAT) |
Compliance Requirements for Lessees
As the withholding agent, the lessee has the following legal obligations:
- Withhold: Deduct the 5% tax at the time the income is paid or becomes payable (accrued), whichever comes first.
- Remit: File BIR Form 0619-E (monthly) and 1601-EQ (quarterly) to remit the taxes.
- Issue Certificate: Provide the lessor with BIR Form 2307 (Certificate of Creditable Tax Withheld at Source). This allows the lessor to claim the withheld amount as a tax credit against their income tax liability.
Summary of Legal Standing
Under Philippine tax law, service charges, CAM fees, and other incidental charges billed by a lessor to a lessee are generally considered part of the gross rentals. Consequently, they are subject to the 5% Expanded Withholding Tax. Failure of the lessee to withhold this tax can lead to the disallowance of the expense for income tax purposes and the imposition of penalties, surcharges, and interest by the BIR.