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May 12, 1970


SUBJECT : Treatment of the 10% Service Charge Billed to Customers by

Keepers of Hotels, Restaurants and Bars

TO : All Internal Revenue Officers and Others Concerned

For quite a number of years some hotels, restaurants and bars, especially of the
higher class, have been collecting a service charge, which is usually 10% of the
customers' bill. This service charge has been represented as charges in lieu of cash
tips to the keepers' employees and on the basis of this representation, this Office held
that such service charge did not constitute part of the taxable receipts of the keepers of
such establishments. The ruling is correct if said service charge is actually given to
the employees. However, it appears that some keepers have not been distributing to
their employees the entire amount of the service charge collected. In such cases, that
portion retained by the keepers is part of his gross receipts and should be subjected to
the 3% or 7% tax as the case may be.

In the light of the foregoing, the following rules are hereby promulgated for the
guidance of all concerned:

(1) The entire 10% service charge shall not form part of the keeper's
taxable receipts if actually distributed to the employees; and

(2) If part of the service charge is retained by the keeper, that part
retained shall form part of the keeper's taxable gross receipts.

(3) In order to insure the collection of the income tax on the share of
the employees in the 10% service charge, the same shall be
considered as part of the employees' total emoluments from
employment for purposes of the withholding tax on wages.


Regional Directors and Revenue District Officers are hereby directed to cause
the verification of the business tax returns of hotels, restaurants, and bars for the
Copyright 2019 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2019 1
purpose of collecting the percentage tax on charges which formed part of their gross
receipts in accordance with the ruling stated in Item (2). To avoid frequent or multiple
examination of business tax returns, however, the verification or investigation should
be timed with the regular examination being made for business tax returns. aisa dc

All internal revenue officers and others concerned are enjoined to be guided
accordingly and to give this circular as wide a publicity as possible.

Commissioner of Internal Revenue


Acting Secretary of Finance

Copyright 2019 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2019 2
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