Libra Realty Corporation

March 23, 2007 BIR RULING [DA-175-07] Sec. 25 (B) Libra Realty Corporation Suite 3-H Columbian International Towers 500 Santol St., Sta. Mesa 1008 M a n i l a Attention: Rafael Antonio S. Domingo President Gentlemen : This refers to your letter dated January 26, 2007, requesting confirmation of your opinion to the effect that, to quote: "1. Ms. Maria Elena Torkehagen, a Norwegian citizen who is a resident of Norway, is not subject to income tax on fees she received from Libra Realty Corporation (Libra, for short),a domestic corporation, for consultancy services performed in Norway; "2. The said income payment is not subject to the EWT; and "3. Libra, the payor of such consultancy fees, is not required to file BIR Form 1604-E (Annual Information Return of Creditable Income Taxes Withheld (Expanded/Income payments Exempt from Withholding Tax (EWT)" It is represented that Ms. Torkehagen is a resident of Norway; that as a Norwegian citizen and a resident of Norway, her presence in the Philippines is not necessary because the domestic corporation merely refers matters needing Ms. Torkehagen's professional advice and recommendation which she in turn transmit to the Philippines either by written memoranda through mail, e-mail, or through telephone; that accordingly her tax status is that of a non-resident alien individual not doing business in the Philippines; that it is your view that since the remuneration paid to Ms. Torkehagen is not subject to Philippine Income Tax, the payor corporation is not under obligation to deduct and withhold income tax from the said income payment; and that, inasmuch as Ms. Torkehagen is a non-resident alien individual who is not doing business in the Philippines and her professional fees constitute income derived from sources outside the Philippines, the same is not subject to income tax, thus the filing of BIR Form 1604-E by the payor-corporation is inappropriate. In reply, please be informed that Section 25 (B) of the Tax Code of 1997 provides: Section 25(B). Non-resident alien individual not engaged in trade or business within the Philippines, provides : "There shall be levied, collected and paid upon the entire income received from all sources within the Philippines by every non-resident alien individual not engaged in trade or business within the Philippines as salaries, wages, compensation, remuneration, twenty-five percent (25%) of such income ..." Under the above quoted provisions of the NIRC, Ms. Torkehagen is subject to income tax only if the following conditions are concurrently fulfilled: 1. she is either a resident or non-resident of the Philippines; 2. derived Philippine-source income; and 3. engaged in trade or business in the Philippines. Under Section 23(D) of the Tax Code: "An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines ,..." Also, under Section 25 (A) (1) of the same Code, "...A non-resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a 'non-resident alien doing business in the Philippines, Section 22 (G) of this Code notwithstanding," Ms. Torkehagen did not come to the Philippines, and therefore, has not stayed in the Philippines for an aggregate period of 180 days during any calendar year. Thus, her status as a non-resident alien individual is one who is not doing business in the Philippines. cHaDIA Moreover, the consultancy services she performed for LIBRA, are rendered outside of the Philippines. Hence, the professional fees for such services constitute income derived from sources without the Philippines. "Section 42(C)(3). Gross income from Sources Without the Philippines. the following shall be treated as income from sources without the Philippines: "xxx xxx xxx "(3) Compensation for labor or personal services performed without the Philippines;' Accordingly, since her tax status is that of a non-resident alien individual who is not doing business in the Philippines and since her professional fees constitute income derived from sources outside the Philippines, the same are not subject to income tax . Moreover, Article 14 of the Tax Treaty entered into between the Philippines and Norway gives Norway the primary right to tax income derived by its residents from independent personal services if such Norwegian resident: 1. does not have a fixed base regularly available to him in the Philippines for the purpose of performing his activities or 2. has not stayed for a period or periods exceeding in the aggregate 183 days in any twelve-month period. "ARTICLE 14 "INDEPENDENT PERSONAL SERVICES" "1. Income derived by a resident of a Contracting State (Norway) in respect of professional services or other activities of an independent character shall be taxable only in that State (Norway) unless: "a) He has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities. If he has such a fixed base, the income may be taxed in the other Contracting State but only so much of it as is attributable to that fixed base; or "b) He is present in the other State for a period or period exceeding in the aggregate 183 days in any twelve-month period in which case the income derived by the individual during such a period or periods may be taxed in the other State (Philippines). "2. The term "professional services" includes especially independent scientific, literary, artistic, educational or teaching as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants." In the light of the foregoing, we are of the view that since the remuneration paid to Ms. Torkehagen is not subject to Philippine income tax, LIBRA is not under obligation to deduct and withhold the income tax from the said income payment. aSCDcH Corollary to the non-taxability of the income payment which, under both the Tax Code and the tax treaty entered into between the Philippines and Norway, is not derived from sources within the Philippines, LIBRA is not under obligation to deduct and withhold income tax from the amount of such payment. "Sec. 2.57.5. Exemption from Withholding . "The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments made to . . . "(B) Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special,..." The payor-corporation is not required to file BIR Form 1604-E on income subject to the expanded withholding tax if the income is not subject to income tax. The obvious purpose of requiring the filing of BIR Form 1604-E covering income payment which is subject to Philippine income tax, although it is not subject to the expanded withholding tax, is to provide the BIR with a means to monitor the income taxation of taxable income. The requirement to file BIR Form 1604-E, however, with respect in particular to the income payments to Ms. Torkehagen is unnecessary and redundant because, in the event that the nature of her income is changed to Philippine-source income and which correspondingly will change her status to that of a non-resident alien individual subject to Philippine income tax, LIBRA, under existing rules, will make an update of her registration status . Nowhere in Section 58 of the NIRC and Section 2.58 (A) (C) of the implementing regulations (Rev. Regs. 20-98) is there an express requirement that an information return (such as BIR Form 1604-E) covering non-taxable income not derived from Philippine sources should be filed where the Philippines does not have jurisdiction to impose a tax on such income payment. In view of the foregoing, this Office hereby confirms your opinion that: (1) the income payments to Ms. Torkehagen are not subject to Philippine income tax; (2) the same are not subject to the expanded withholding tax; and, (3) the failure of LIBRA to file BIR Form 1604-E, with respect to such non-taxable income payments, is not subject to penalties, there being no violation of the Tax Code and implementing regulations for not filing the same. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service