BIR Ruling [DA-112-06]

March 16, 2006 BIR RULING [DA-112-06] Section 78 and RR 2-98 DA-050-2006 German Development Service 11th Floor, PDCP Bank Centre Bldg., V.A. Rufino cor. L.P. Leviste Streets, Salcedo Village, 1227 Makati City Attention: Christoph Dehn Country Director Gentlemen : This refers to your letter dated February 16, 2006 requesting a reconsideration of BIR Ruling DA-396-2004 dated July 21, 2004 classifying the German Development Service/DED ("DED") as an international non-government private voluntary organization (NGO) pursuant to Section 2.78.1 (B)(5) of Revenue Regulations (Rev. Regs.) No. 2-98. It is represented that DED, in its first letter to BIR dated November 21, 2003, failed to inform the BIR that DED is 95% owned by the Federal Republic of Germany as represented by the Federal Ministry of Economic Cooperation and Development and that 97% of its funding comes from the German government; that this omission led the BIR to classify DED as an international NGO and not as international organization which would have otherwise exempted it from being constituted as a withholding agent of its employees and staff for taxation purposes; and that the following documents are submitted to prove that DED is an international organization, to wit: 1. DED Articles of Association; 2. Excerpts from the DED Annual Report 2004; and 3. The 1990 Basic Agreement between the Philippine and German Governments. In reply, please be informed that Section 2.78.1 (B) (5) of Rev. Regs. No. 2-98, otherwise known as the Withholding Tax Regulations implementing Section 78 of the Tax Code of 1997, provides: "(B) Exemption from withholding tax on compensation . The following income payments are exempted from the requirement of withholding tax on compensation: 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." CaDATc After a thorough review of the documents submitted to this Office, it appears that DED is not an international NGO but an international organization and agency of the Government of Federal Republic of Germany. This is shown by the fact that 95% of the ownership interest of DED is held by the German Government which also finances the bulk of DED's operating expense. In view thereof, this Office hereby grants your request for a reconsideration of our earlier ruling and accordingly classifies DED as an international organization or an entity having international personality as contemplated under Section 2.78.1 (B) (5) of Rev. Regs. No. 2-98. Thus, its staff and employees are not subject to the withholding tax on compensation. In the interest of good governance, however, it is earnestly requested from DED to remind its Filipino employees to declare their income and pay the corresponding tax due thereon. This ruling modifies BIR Ruling DA-396-2004 dated July 21, 2004. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service