BIR Ruling [DA-396-04]

July 21, 2004 BIR RULING [DA-396-04] RR 2-98 198-99 German Development Service 7 Juan Luna Street San Lorenzo Village 1223 Makati City Attention: Mr. Christoph Dehn Country Director Gentlemen : This refers to your letter dated November 21, 2003 requesting for clarification as to whether the salaries being paid by the German Development Service/DED to its local staff are not subject to withholding tax on wages, pursuant to Section 71(a)(4) of the Tax Code on the ground that it is an international organization. It is represented that the German Development Service/DED is the development service of the Federal Republic of Germany for personnel cooperation; that it is a non-profit, public limited company, jointly owned by the Federal Republic of Germany represented by the Ministry for Economic Cooperation and Development and an association of non-government organizations working in the development field; that DED was established in 1963 and since then more than 10,000 development workers have committed themselves to improving the living conditions of people in Africa, Asia and Latin America; that more than 1,000 development workers are currently working in 45 host countries; that the development worker, German or any other European nationality, are professional experts working with a two-year contract extendable up to 7 years within an organization in the host country; that on the basis of the 1990 Basic Agreement entered into by the Philippine and German governments, DED-Philippines started its operation in 1991; that your focus sectors are sustainable agriculture, solid waste management, integrated coastal zone management and dual technical training; that your partner organizations are: Non-government Organizations (NGOs),government Institutions, Peoples Organizations/Self-help Initiatives, Industrial/handicraft Associations and Educational Institutions; and that at present you have around 40 development workers who are fielded in various areas in the Philippines, mostly in the Visayas region. CaDEAT In reply, please be informed that pursuant to Section 2.78.1(B)(5) of Revenue Regulations 2-98 implementing Section 78 of the Tax Code of 1997, remuneration paid for services performed as an employee of a foreign government or an international organization is exempt from withholding tax on compensation. "International Organizations" are associations of States, established by treaties between two or more State, whose functions transcend national boundaries and which are for certain purposes subjects of international law. Public international organizations (as distinguished from "private" or "non-government" organization) include global, all purpose organizations specialized agencies of the United Nations; other global functional organizations; and regional organizations. Non-Governmental Organizations (NGO's) are private, international organizations that serve as a mechanism for cooperation among private national groups in international affairs, particularly in economic, social, cultural, humanitarian and technical fields. Under Art. 71 of the UN Charter, the Economic and Social Council is empowered to make suitable arrangements for consultation with NGO's on matters within its competence. Except for limited purposes under international humanitarian law, NGO's are not subjects of international law. Unlike, international organizations, e.g.,Asian Development Bank (ADB) and International Rice Research Institute (IRRI) created out of an international agreement to which the Philippines is a signatory, are not required to withhold any tax on compensation payments made by it to its Filipino employees. ( BIR Ruling No. 228-92 dated August 21, 1992 ). Based on the above, German Development Service/DED is not an international organization or entity having international personality as contemplated under the aforequoted Section 2.78(B)(5) of Revenue Regulations 2-98 but rather an international non-government private voluntary organization (NGO) which was duly granted a license to transact business by the Securities and Exchange Commission. Thus, your request for a certificate of exemption from withholding taxes on compensation for the employees and staff of German Development Service/DED is hereby denied for lack of legal basis. Accordingly, German Development Service/DED shall withhold and remit to BIR the corresponding withholding tax on compensation for the salaries and wages it pays to its employees in accordance with Section 2.79 in relation to Section 2.78.1 of Revenue Regulations No. 2-98. ( BIR Ruling No. 198-99 dated December 10, 1999 ) Moreover, the Development Workers specialists who after completing their training and studies served several years on the public or private sector and are willing to work in the Republic of the Philippines without gainful intent in order to promote specific projects in the Philippines, shall be exempt from all direct taxes and similar charges on payments made to them from German funds for their work pursuant to the Basic Arrangement between the Government of the Federal Republic of Germany and the Republic of the Philippines. Thus, said development workers are not subject to withholding tax on wages imposed under Section 79 of the Tax Code of 1997. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group