BIR Ruling

October 19, 1967 General Eulogio Balao Chief of Mission Philippine Reparations Mission 46 Nampeidai-machi, Shibuya-ku Tokyo, Japan S i r : This refers to your request for information on a query, pertinent portion of which is quoted hereunder as follows: "While under the law, the tax withheld should be remitted quarterly to the Bureau of Internal Revenue, this mission cannot do so without violating the Reparations Agreement between Japan and the Philippines and the Foreign Exchange Law of Japan. The Reparations Agreement specifically provides that the expenses of the Mission received from the Japanese Government, from which the salaries of its personnel are taken, " can in no case be remitted abroad " (Emphasis supplied). Furthermore, under the Foreign Exchange Law of Japan, the salaries of Mission personnel are inconvertible into other currencies. cdpr "It is restated that Mission personnel had consistently filed their Individual Income Tax Returns and paid income taxes due without any withholding tax certificate direct to the internal revenue offices in Manila or any of its agencies located nearest their respective residences in the Philippines, and the Bureau of Internal Revenue has not made any objection to the practice. "In view of the fact that it would be illegal for the Mission or for any other person or agency to remit abroad the yen withholding tax collected, it is suggested that the Mission personnel be allowed to continue their practice of paying income taxes due directly to the proper Internal Revenue Office or Agency in the Philippines. However, to assure collection by the Government of taxes due, the withholding of taxes by the Mission, through payroll deductions, shall be continued and the amount collected shall be held in trust by this Mission and shall not be refunded to the personnel except upon presentation of receipts covering income tax payments or in the case of individuals not subject to tax, upon presentation of copies of income tax returns duly noted by the receiving Internal Revenue officer. prcd "Early advice regarding the above matter will be highly appreciated." In reply thereto, I have the honor to inform you that the present practice of your office and its personnel as regards the filing of income tax returns and the payment of the corresponding tax as well as the withholding of tax on the basic salaries of the Mission personnel is legal and proper. However, the Mission should not deposit or keep in trust, but should remit and pay to the Bureau of Internal Revenue the tax deducted and withheld from the basic salaries of its personnel within the time prescribed by Article 4 of the Withholding Tax Law. The basic salaries of the Filipino employees of the Mission, whether paid within or without the Philippines, are subject to withholding tax since such salaries do not come under the exceptions enumerated under Article I of Supplement A of the Tax Code. The salaries of said employees cannot come under the third exception, namely, remuneration for services rendered for a foreign government, since the employees of the Mission in Japan are employees of the Philippine Government. (Re: your letter to C.I.R. dated May 18, 1967) Although the amounts paid as salaries to those employees may have been provided for by the Japanese Government pursuant to the Reparations Agreement between the two countries, this does not make them employees of the Japanese Government. The fact that the salaries are being paid in Japanese yen is not a sufficient reason for exemption from withholding tax since the tax may be computed based on the peso equivalent of the yen at the time of payment. Section 17, par. (a) of Revenue Regulations No. V-8 of the Department of Finance and Article 4 of Section 12 of Republic Act No. 590 otherwise known as the Withholding Tax Law provide as follows: "The employer is required to collect the tax by deducting and withholding the amount thereof from the employee's wages as and when paid (emphasis ours), either actually or constructively. An employer is required to deduct and withhold the tax notwithstanding the wages are paid in something other than money (for example, wages paid in stocks or bonds) and to pay the tax to the collecting officer designated in Article 4 of Supplement A . If wages are paid in property other than money, the employer should make necessary arrangements to insure that the amount of the tax required to be withheld is available for payment to the collecting officer ." (emphasis supplied) LLpr "Art. 4. Return and payment to the Government of taxes withheld Taxes deducted and withheld hereunder by the employer on wages of employees shall be covered by a return and paid to the treasurer of the province, city or municipality in which the employer has his legal residence or principal place of business, or, in case the employer is a corporation, in which the principal office is located. The return shall be filed and the payment made within twenty-five days from the close of each calendar quarter. The taxes deducted and withheld by employers shall be held in a special fund in trust for the Government until the same are paid to the said collecting officers. The Commissioner of Internal Revenue may, within the approval of the Secretary of Finance, require employers to pay or deposit the taxes deducted and withheld at more frequent intervals, in cases where such requirement is deemed necessary to protect the interest of the Government." As the withholding agent for the government, the Mission is required under the abovequoted provisions of the law and regulations to deduct and remit or pay the tax thus deducted and withheld from the mission employees to the government within twenty-five (25) days after the end of the quarter when payment of salaries were made or, if the tax withheld amounts to P200.00 or more a month, within ten (10) days after the end of the month when payment of salaries were made excepting those paid on a month which is the close of a quarter the withholding tax on which may be paid within twenty-five (25) days after the end of the quarter; otherwise, the Mission shall be liable to a surcharge of five per centum (5%) of the amount of tax deducted but unremitted and interest at the rate of one per centum (1%) a month upon the amount required to be paid from the time the same became due until paid, in addition to a compromise penalty in extrajudicial settlement of the penal liabilities arising from such violation, in an amount which shall be determined by this Bureau. As heretofore, stated, the fact that the salaries of such mission employees are being paid in Japanese yen; that the Reparations Agreement specifically provides that the expenses of the Mission received from the Japanese Government, from which the salaries of its personnel are taken, "can in no case be remitted abroad", that under the Foreign Exchange Law of Japan, the salaries of Mission personnel are inconvertible into other currencies; and that the amounts paid as salaries to those employees may have been provided for by the Japanese Government pursuant to the Reparations Agreement between the two countries do not constitute valid reasons for non-compliance by the Mission with the aforementioned statutory requirements. prll Moreover, withholding is only a method of collecting income tax at source from individual wage earners currently upon the receipt of income. It is just an attempt to collect the approximate tax liability on employee's wages or salaries. The employers under the system are constituted the withholding agents of the government and are required to withhold and deduct the corresponding tax from each wage payment based upon the prescribed government table. The amount of tax to be withheld from the salaries or wages of taxpayers vary in accordance with their rates of pay and the periods of payment. The amounts withheld from salaries may or may not, however, be the correct tax. So that, if the "actual tax" (computed at the end of the year when the regular income tax return is filed) is more or less than the amount withheld, an adjustment will be made. When the tax withheld by the employer is less than the correct amount of tax payable, the employer is authorized to collect from the employees the amount of undercollection from later payments of their wages. On the other hand, if more than the correct amount of tax is deducted from any wage payment in any quarter, the overcollection may be repaid to the employee and of course this reimbursement between the employer and employee will take place only when the amount deducted and withheld has not as yet been remitted to the Bureau of Internal Revenue. However, credits and refunds of taxes withheld by the employer and paid over or remitted to the Government become matters for settlement between the Bureau of Internal Revenue and the employee. In this connection, it may be stated, that in general, citizens of the Philippines like the Mission employees are subject to Philippine income tax on all income received by them from all sources, be they derived from within or without the Philippines, or both, regardless of the place of their residence. In all cases, however, Filipinos residing abroad may claim as credit against the Philippine income tax any income, war-profits, and excess profits taxes paid or accrued during the taxable year to any foreign country. cdta Filipinos residing abroad deriving a gross income of P1,800 or over for the taxable year must file an income tax return (Sec. 45(a), Tax Code). They may secure and file the return with any Philippine Consulate or internal revenue attache, if any, in their place of residence. If there is no consulate or attache, or if no form is available in the offices of said consulates or attaches, they should request the Commissioner of Internal Revenue, Manila, for said forms. The return may be filed with any consulate or internal revenue attache, if any, or direct with the Commissioner of Internal Revenue by mail. In any case, as the income tax is now payable upon the filing of the return, they should accompany their returns with the corresponding draft covering the amount of the tax, if any tax is due as indicated in their return. Please be guided accordingly. cdt Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue