BIR Ruling [DA-474-06]

August 4, 2006 BIR RULING [DA-474-06] 23 (B); DA-091-04 Atty. Redencio C. Villarivera 2nd Floor, DMCI Plaza Bldg. 2281 Pasong Tamo Extension Makati City S i r : This refers to your letter dated March 20, 2006 requesting for a ruling whether or not regular employees of DMC-Urban Property Developers, Inc. (DMC-UPDI) who are assigned abroad will qualify under the "non-resident citizen" status and are exempt from income tax and consequently from the withholding tax. Documents submitted show that DMC-UPDI is a corporation duly organized and existing under and by virtue of the laws of the Philippines and is engaged in the business of property construction and. development. Aside from DMC-UPDI's customers here in the Philippines, part of its target clients are Filipinos who are based abroad who may want to purchase houses, lots or condominium units in the country. For this purpose, it is necessary for DMC-UPDI to send one of its employees, Ms. Ma. Rebecca A. Consunji, a Marketing and Research Officer to perform advertising, promotional, research and marketing activities abroad. The work of said employee is rendered outside of the Philippines for the aggregate period of two hundred fifty two (252) days from January to December of 2006 but her salary is paid by DMC-UPDI in the Philippines. In reply, please be informed that Section 23(B) of the Tax Code of 1997, as amended provides: "(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;" Section 23 of the said Tax Code espouses the source rule of income taxation, except for resident citizens and domestic corporations who remain taxable on their worldwide income. In line with the source rule, nonresident citizens and resident aliens are taxed only on their Philippine-sourced income. Under this provision, resident citizens are subject to Philippine tax on their income derived within and without the Philippines. On the other hand, non-resident citizens are subject to Philippine tax only on their income within the Philippines. In the case of income from the provision of services, such income is considered derived from sources without the Philippines if the services are performed outside the Philippines, a stated in Section 42(C)(3) of the 1997 Tax Code: "SEC. 42. Income from sources within the Philippines. xxx xxx xxx (C) Gross Income From Sources Without the Philippines. The following items of gross income shall be treated as income from sources without the Philippines: xxx xxx xxx (3) Compensation for labor or personal services performed without the Philippines;" While it is true that the advertising, promotions and marketing services rendered by Ma. Rebecca A. Consunji for DMC-UPDI are all carried out beyond the territorial jurisdiction of the Philippines, the period of her stay outside of the country "most of the time" should likewise be taken into consideration. In BIR Ruling No. DA-369-05 dated August 30, 2005, this Office opines that: ". . . , for purposes of exemption from income tax, a citizen must be deriving foreign-sourced income for being a non-resident citizen under Section 23(B) of the Tax Code of 1997 or for being an overseas contract worker (OCW) under Section 23(C) of the same Tax Code. . . ., the issue on whether or not you are a non-resident citizen depends on whether your services are rendered abroad for more than 183 days in which case said services are exempt from Philippine income tax. In this connection the phrase "most of the time" which is used in determining when a citizen's physical presence abroad will qualify him as non-resident, shall mean that the said citizen shall have stayed abroad for at least 183 days in a taxable year." Applying the foregoing, Ma. Rebecca A. Consunji can be considered a nonresident citizen of the Philippines, and as such the payment of her salary being income not derived from sources within the Philippines is exempt from Philippine income tax and consequently from the withholding tax. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. TADCSE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service