The treatment of service charges in the Philippine hospitality and service industry is governed by a intersection of tax regulations and labor mandates. Recent legislative shifts, specifically the enactment of Republic Act No. 11360, have fundamentally altered how these fees are distributed, while the Bureau of Internal Revenue (BIR) maintains strict guidelines on their taxability.
I. The Nature of Service Charges
A service charge is a fee added to the bill of customers by establishments like hotels, restaurants, and similar entities for the services rendered. Unlike a "tip," which is voluntary and given directly to a specific server, a service charge is an itemized, mandatory fee imposed by the establishment.
Legal Basis for Distribution
Before 2019, the Labor Code mandated an 85-15 split (85% for employees, 15% for management). However, Republic Act No. 11360 (The Service Charge Law), which took effect in late 2019, amended Article 96 of the Labor Code.
The current rule is absolute: 100% of the service charges collected must be distributed completely and equally among all covered employees.
II. Labor Law Perspective: Distribution Rules
1. Coverage of Employees
The 100% distribution applies to all employees under the direct employ of the establishment, regardless of their position, designation, or employment status. This includes:
- Regular, contractual, and seasonal workers.
- Waitstaff, kitchen staff, and back-of-house personnel.
Exception: "Managerial employees" are excluded from the distribution. Under the law, managerial employees are those who lay down and execute management policies or have the power to hire, fire, or discipline employees.
2. Frequency of Distribution
The service charge must be distributed once every two weeks or twice a month at intervals not exceeding sixteen (16) days.
3. Non-Diminution of Benefits
The law explicitly states that the 100% distribution of service charges shall not be used to justify the reduction of existing salaries or benefits. If an establishment was already providing higher benefits before the law, they cannot pull back those benefits to "offset" the increased service charge share.
III. Tax Treatment: Value-Added Tax (VAT)
The tax treatment of service charges is often a point of confusion for both consumers and business owners. Under Philippine tax law (National Internal Revenue Code), the following rules apply:
1. Inclusion in the Gross Selling Price
For VAT-registered establishments, the service charge is considered part of the "Gross Receipts" or "Gross Selling Price." Because the service charge is a mandatory fee imposed by the establishment as a condition of the sale, the BIR views it as part of the total cost of the service. Consequently, the 12% VAT is applied to the sum of the food/service cost plus the service charge.
Example Calculation:
- Food Order: ₱1,000.00
- Service Charge (10%): ₱100.00
- Total Taxable Amount: ₱1,100.00
- VAT (12% of 1,100): ₱132.00
- Total Bill: ₱1,232.00
2. Receipting Requirements
Establishments are required to clearly indicate the service charge as a separate line item on the Official Receipt (OR) or Sales Invoice. Since it is part of the gross receipts, it must be reflected in the establishment's quarterly and monthly VAT returns.
IV. Income Tax Implications for Employees
While the service charge is 100% distributed to employees, it is not "tax-free" for the recipient.
- Taxable Income: For the employee, the share received from the service charge is considered part of their "other income" or "supplementary income."
- Withholding Tax: This amount must be added to the employee’s gross compensation for the period and is subject to the graduated income tax rates under the TRAIN Law.
- Exemption: If the employee's total annual taxable income (including the service charge share) does not exceed ₱250,000, it remains effectively exempt from income tax.
V. Dispute Resolution and Enforcement
The Department of Labor and Employment (DOLE) exercises primary jurisdiction over disputes regarding the distribution of service charges.
- Labor Inspections: DOLE conducts regular inspections to ensure compliance with RA 11360.
- Grievance Machinery: In organized establishments with a Collective Bargaining Agreement (CBA), disputes are resolved through the internal grievance procedure.
- Single Entry Approach (SEnA): In the absence of a CBA, aggrieved employees may file a claim through SEnA for conciliation and mediation.
| Feature | Old Rule (Labor Code) | New Rule (RA 11360) |
|---|---|---|
| Employee Share | 85% | 100% |
| Management Share | 15% (for losses/breakage) | 0% |
| Beneficiaries | Rank-and-file | All employees (except Managers) |
| VAT Treatment | Included in Gross Receipts | Included in Gross Receipts |
VI. Summary of Management Responsibilities
To remain compliant with both the BIR and DOLE, management must:
- Ensure the 12% VAT is calculated on the total amount including the service charge.
- Abolish the "management share" and remit the full amount to non-managerial staff.
- Maintain transparent records of collections and distributions for audit purposes.
- Refrain from using the service charge to pay for breakages, losses, or as a substitute for the minimum wage.