BIR Ruling [DA-050-06]

February 15, 2006 BIR RULING [DA-050-06] Section 78; BIR Ruling No. 37-89; 232-89; & DA-396-04 Platon Martinez Flores San Pedro & Leao 6/F & 7/F, Tuscan Building 114 V.A. Rufino St. (Formerly Herrera) Legaspi Village, Makati City Attention: Atty. Grace P. Quevedo-Panagsagan Gentlemen : This refers to your letter dated April 26, 2005 jointly signed with Atty. Arturo G. Selim requesting on behalf of your client, Deutsche Gesselschaft fur Technische Zusammenarbeit GmbH ("GTZ" for brevity a.k.a. German Agency for Technical Cooperation), for a confirmation of your opinion that the salaries being paid by GTZ, an international organization, to its employees are not subject to the withholding tax on wages. It is represented that GTZ is an agency of the Government of the Federal Republic of Germany tasked to implement the German Government's contribution concerning technical cooperation with the Government of the Republic of the Philippines pursuant to an Agreement between the Government of the Federal Republic of Germany and the Government of the Republic of the Philippines Concerning Technical Co-operation executed on September 7, 1971 and with Diplomatic Exchange of Notes, the latest of which is dated May 6, 2002; that GTZ is owned by the German Federal Government and was commissioned by the Government of the Federal Republic of Germany to undertake specialist technical cooperation with developing countries; that most of the activities of GTZ are carried out on behalf of the German Federal Government on a non-profit basis and are governed by international agreements between the German Federal Government and the partner countries; and that pursuant to this mission, GTZ maintains an office in the Philippines where it employs Filipinos as part of its staff. In reply, please be informed that Section 2.78.1(B)(5) of Revenue Regulations No. 2-98, otherwise known as the Withholding Tax Regulations implementing Section 78 of the Tax Code of 1997 provides: "(B) Exemptions from withholding tax on compensation. The following income payments are exempted from the requirement of withholding tax on compensation: aESIHT xxx xxx xxx "(5) Compensation for services by a citizen or resident of the Philippines for a foreign government or an international organization. Remuneration paid for services performed as an employee of a foreign government or an international organization is exempted. The exemption includes not only remuneration paid for services performed by ambassadors, ministers and other diplomatic officers and employees but also remuneration paid for services performed as consular or other officer or employee of a foreign government or as a non-diplomatic representative of such government." In view of the foregoing, it appearing that GTZ is an international organization and agency of the Government of the Federal Republic of Germany, this Office confirms your opinion that its employees are not subject to the withholding tax on compensation. However, in the interest of good governance, it is earnestly requested from GTZ to remind its Filipino employees to declare their income and pay the corresponding tax due thereon. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered as null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue