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In an
atmosphere of fierce competition, sales incentives act
as important factors in enhancing sales performance. And
one of the tools often used by companies to improve
their sales revenue is the grant of commissions to their
sales personnel.
As
opposed to salary, which is a fixed compensation for
services paid on a regular basis, a commission is a fee
or remuneration paid to an agent, representative or
employee for services rendered, which is usually
determined based on individual sales. Commissions may
come in the form of profit shares, performance bonuses,
performance incentives, or even sales discounts. Common
industries where commission is used prevalently include
car sales, property sales, insurance broking and many
other sales jobs.
The tax
treatment of commissions would depend or whether an
employer-employee relationship exists between the payor
and the recipient, and whether the commission is being
paid by reason of that relationship. It is significant
to note that an employer-employee relationship exists
when the person for whom services are performed has the
right to control and direct the individual who performs
the services not only as to the result to be
accomplished by the work, but also as to the details and
means by which that result is accomplished. In this
connection, it is not necessary that the employer
actually directs or controls the manner in which the
services are performed; it is sufficient that he has the
right to do so. The right to discharge is also an
important factor that the person possessing that right
is an employer. Other factors characteristic of an
employer, but not necessarily present in very case, are
furnishing the tools and furnishing of a place of work
to the individual who performs the services.
A
typical situation where a commission is paid under an
employer-employee relationship is when the employee
receives sales commissions, profit shares, performance
bonuses or incentives in addition to salary. These fees
are typically considered supplemental compensation.
In cases
where a commission is paid by reason of an
employer-employee relationship, the commission should be
treated as employee compensation. Based on existing tax
rules, “compensation” includes all remuneration for
services, however designated, including salaries, wages,
emoluments and honoraria, allowances, commissions,
fees—including director’s fees, taxable bonuses and
fringe benefits. Thus, the commission would be subject
to the withholding tax applicable to salaries of
employees. However, this commission would not be subject
to value-added tax or other business taxes.
On the
other hand, commissions paid for the services of a
person other than an employee are subject to the
expanded/creditable withholding taxes. The
withholding-tax rate, however, would depend on the
nature of activities rendered by the recipient.
Regardless of the amount, a creditable withholding-tax
rate of 10 percent is imposed on gross commissions or
service fees of customs, insurance, stock, real estate,
immigration and commercial brokers and fees of agents of
professional entertainers. The same rate is applied on
gross commissions, rebates, discounts and other similar
considerations paid or granted to independent and/or
exclusive sales representatives and marketing agents and
subagents of companies, including multilevel marketing
companies, on their sale of goods or services by way of
direct selling or similar arrangements where there is no
transfer of title over the goods from the seller to the
agent/sales representative.
Other
than these specific types of activities, the commission
may be classified as professional, promotional and
talent fees or any other form of remuneration for
services rendered. As such, depending on the amount of
income of the recipient, the withholding-tax rate may
either be 15 percent or 10 percent.
Regardless of the applicable withholding-tax rate, the
creditable-taxes withheld, as the term suggest, are
creditable against the income tax due of the recipient.
The recipient is, therefore, required to report the
commission income in his income-tax return and claim the
taxes withheld as credit.
Likewise, as an income derived from the performance of
services, the commission should be subject to the
value-added tax or to a 3-percent percentage tax, as the
case may be. Whether subject to value-added tax or to
percentage tax, the payee, as a rule, is required to
issue duly registered receipts to cover all receipts of
commissions.
Given
the difference in the tax treatment of commissions, it
pays to know these tax effects so that attendant
compliance requirements imposed by the tax authorities
are fully satisfied by both the payors and payees of
commissions. Through this article, we hope we are able
to help clarify the tax treatment of commissions for the
proper guidance of concerned taxpayers.
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The author is an associate of BDB Law. If you have any
comments or questions concerning the article, you can
e-mail the author at christopher.m.duque@bdblaw.com.ph
or call 856-2952. |
