Executive summary

In Philippine practice, service charge is generally included in the base for Expanded Withholding Tax (EWT) when it forms part of the amount paid for the supplier’s sale of services (e.g., hotel/restaurant bills), subject to the usual rule that EWT is computed on the amount net of VAT if the supplier is VAT-registered and VAT is separately billed.

There is a narrow, fact-dependent argument for exclusion if the “service charge” is truly collected and held in trust solely for employees and is not income of the establishment—but the safer compliance position for most payers is: include service charge in the withholding base (exclude VAT, not the service charge).

1) Key concepts and why the question matters

What is “service charge” in the Philippine setting?

For hotels, restaurants, and similar establishments, a “service charge” is commonly a mandatory add-on (often shown as a percentage of the bill) that is intended to be distributed to covered employees under Philippine labor rules. In day-to-day billing, it appears as a separate line item on official receipts/invoices.

What is EWT?

EWT is the withholding system where the payor withholds a creditable income tax from certain income payments to suppliers. The withheld amount is creditable against the supplier’s income tax.

The practical question

When you pay a supplier (e.g., a hotel), do you compute EWT on:

Food/room charges only, or
Food/room charges + service charge, or
Total bill including VAT?

2) The legal framework you must keep in mind

(A) Withholding is tied to an “income payment”

Under the National Internal Revenue Code (NIRC) and BIR withholding regulations, the obligation to withhold generally attaches when a payor makes an income payment that falls under categories subject to EWT.

(B) The default withholding base is “gross” — with a VAT carve-out

In general, EWT is computed on the gross amount payable that represents the supplier’s income except that VAT is excluded from the withholding base if:

the supplier is VAT-registered, and
VAT is separately indicated on the invoice/official receipt.

This “exclude VAT, not other charges” principle is what drives most EWT computations in practice.

(C) Labor law affects who ultimately benefits from the service charge

Philippine labor rules treat service charges in covered establishments as amounts intended for employees. This affects internal allocation by the employer and the tax character on the employee side (typically handled under withholding tax on compensation, not EWT).

But the payer’s EWT question is different: what is the “income payment” to the supplier at the point of billing?

3) General rule: Include service charge in the EWT base (net of VAT, if applicable)

Why service charge is typically included

From the payer’s perspective, a hotel/restaurant invoice usually reflects a single consideration for the service transaction, commonly broken down into:

basic charges (room/food),
service charge, and
VAT (if VAT-registered).

Even if the establishment later distributes the service charge to employees, the payer is still paying the establishment. In many real-world tax treatments, service charge is viewed as part of the establishment’s gross receipts from the transaction and therefore part of the income payment stream on which EWT applies—unless a clear legal/contractual structure shows the establishment is merely a pass-through agent for that portion.

VAT rule still applies

If the supplier is VAT-registered and VAT is separately billed, you compute EWT on the amount exclusive of VAT, but inclusive of service charge.

Practical shorthand used by many withholding agents:

EWT base = (Total invoice amount) – (VAT component) (This naturally keeps service charge inside the base if it is not VAT itself.)

4) The “exception” argument: when might service charge be excluded?

Exclusion is not the mainstream approach for ordinary vendor payments, but conceptually it can arise if all (or nearly all) of the following are true and well documented:

The service charge is explicitly mandated/treated as belonging to employees, and
The establishment acts as a mere collecting agent or trustee for employees for that portion, and
The invoicing/contracting structure clearly supports that the payer is not paying the establishment for its own account with respect to the service charge, and
The arrangement is consistent with how the establishment treats it for tax and accounting (e.g., not recognizing it as revenue), and
The position is supportable under BIR audit scrutiny.

Reality check: Most standard hotel/restaurant bills do not provide the payer enough legal basis to treat service charge as a separate payment to employees. The payer pays the establishment; the establishment handles distribution. Because EWT is an enforcement mechanism, conservative practice is to include the service charge.

5) Computation examples (most common scenarios)

Example 1 — VAT-registered hotel, VAT separately stated

Assume:

Room/food: ₱100,000
Service charge: ₱10,000
Subtotal (VATable): ₱110,000
VAT 12%: ₱13,200
Total bill: ₱123,200

If the applicable EWT rate for the payment is 2% (rate depends on your transaction/ATC), then:

EWT base (exclude VAT): ₱110,000
EWT: ₱110,000 × 2% = ₱2,200

✅ Service charge is included in the base. ✅ VAT is excluded from the base.

Example 2 — Non-VAT supplier (percentage tax), no VAT to back out

Assume:

Charges: ₱100,000
Service charge: ₱10,000
Total: ₱110,000
EWT base: ₱110,000
EWT at 2%: ₱2,200

✅ Service charge is included because there is no VAT exclusion step.

Example 3 — VAT-registered supplier, but VAT not separately indicated

If VAT is not separately stated, many withholding agents take the conservative position that the entire billed amount is subject to withholding (because the “exclude VAT” rule is typically applied only when VAT is separately shown). This can create disputes and cashflow friction—so require proper invoices/ORs.

6) Interaction with employee taxation (often confused with EWT)

It’s common to mix up two different withholding systems:

A) EWT (payor → supplier)

Withheld by the customer/payor from payments to the business.
Creditable to the supplier.

B) Withholding tax on compensation (employer → employee)

Withheld by the employer from employee compensation.
Applies to taxable compensation, subject to exemptions/thresholds under current rules.
Service charge distributed to employees is generally treated as part of what employees receive by virtue of employment in many cases, so it is typically handled on the employee withholding side (not by the customer).

Even if the employer must distribute service charges to employees under labor rules, that does not automatically change the customer’s EWT base, because the customer’s legal counterparty remains the establishment.

7) Compliance checklist for withholding agents (practical, audit-friendly)

Identify if the payment is subject to EWT Not all payments are covered; it depends on the nature of the transaction and your status (e.g., top withholding agent, government payor, etc.).
Check VAT registration and invoicing
- If VAT-registered and VAT is separately stated → exclude VAT from EWT base.
- If not → base is typically the full amount payable.
Treat service charge as part of the base by default Unless you have unusually strong documentation that the payee is a mere conduit for that portion.
Match your remittance and certificates Ensure the withheld amount ties to the supplier’s tax certificate and your books.
Be consistent Inconsistent treatment (sometimes including service charge, sometimes not) is a red flag in audits.

8) Common Q&A

“Service charge is for employees—why should we withhold on it?”

Because EWT is based on the income payment made to the payee as invoiced/collected. In ordinary billing, the amount is paid to the establishment, which then distributes it. The payer typically has no privity with employees.

“Should we compute EWT on the amount including VAT?”

Normally no, if the supplier is VAT-registered and VAT is separately stated. EWT is computed on the net-of-VAT amount.

“What if the invoice shows ‘service charge not subject to VAT’?”

That is unusual for many standard hotel/restaurant transactions. If a supplier asserts a special treatment, the payer should ask for the legal basis and ensure the invoice is consistent with the supplier’s tax classification. For EWT, however, the charge can still be part of the income payment even if its business tax treatment differs; the safest approach remains to include it in the EWT base unless clearly excluded by law/regulation and documentation.

“If we include service charge in the base, won’t the supplier be ‘over-withheld’ since it passes the money to employees?”

That’s a commercial/tax administration concern, but EWT is creditable to the supplier; the supplier can apply the credit against its income tax (or manage its internal allocations). From the payer’s risk standpoint, under-withholding generally carries higher exposure than conservative withholding.

Bottom line

Yes—service charge is generally included in the EWT computation base in the Philippines, with the usual rule that VAT (if separately billed) is excluded, not the service charge. Only in atypical, well-documented pass-through/trust arrangements—rare in routine hotel/restaurant billing—might exclusion be defensible.

If you want, paste a sample invoice line breakdown (amounts only; redact names/TINs), and I’ll compute the EWT base the way a conservative Philippine withholding agent would document it.