BIR Ruling [DA-554-99]

September 27, 1999 BIR RULING [DA-554-99] Laya Mananghaya & Co. 22/F Antel Corporate Center Valero corner Sedeno Streets Salcedo Village, Makati City Attention: Mr . Mariano C . Ereso Tax Principal Gentlemen : This refers to your request for confirmation of your opinion that Mr. Augusto C. Cabugao, your client, was a nonresident citizen for the period January 1, 1998 to June 30, 1999, and that as such, his compensation income during his assignment as Regional Audit Manager for Asia-Pacific Region in Bangkok, Thailand is not subject to income tax pursuant to Section 23(B) in relation to Sections 22(E)(3), 22(E)(4), 42(A)(3) and 42(C)(3) of the Tax Code, as amended by Republic Act 8424. It is represented that Mr. Augusto C. Cabugao, a citizen of the Philippines, was assigned as Regional Audit Manager for the Asia-Pacific Region based in Bangkok, Thailand for the period October 1997 to June 30, 1999; that such assignment was made under arrangements with Caltex Corporation, a nonresident foreign corporation and the parent company of Caltex (Philippines), Inc. (for brevity, CPI), a corporation organized and existing under the laws of the Philippines; that as Regional Audit Manager, Mr. Cabugao's responsibilities included among others interfacing with responsible officials of the various Caltex entities/affiliates on operational and control matters as well as designing a risk-based annual audit plan and direction of internal audit functions within the Asia-Pacific Region; that while he is an employee of CPI, Mr. Cabugao was under the direction and control of, and reported directly to, Caltex Corporation; that during his assignment by Caltex Corporation as Regional Audit Manager for the Asia-Pacific Region in Bangkok, Thailand, CPI, for reasons of expediency, continued to pay him, for the account of Caltex Corporation, his compensation; that the amounts paid to him by CPI were recharged by the latter to Caltex Corporation; that despite the recharging by CPI to Caltex Corporation, the former nevertheless continued to deduct and withhold the tax due on his compensation during his assignment in Bangkok, Thailand, which was remitted to the government; that CPI likewise continued to include him in the Alpha List of Employees of CPI, but did not claim the compensation income paid to Mr. Cabugao as a business expense deduction in the computation of its corporation income tax liability; and finally, that his assignment in Bangkok, Thailand, which required him to be physically present abroad most of the time, ended on June 30, 1999 and that he has been reassigned by Caltex Corporation to CPI effective July 1, 1999. On the basis of the foregoing, you now request for a ruling that the deduction and withholding of the tax on Mr. Cabugao's compensation and his inclusion in the Alpha List of Employees of CPI during his assignment in Bangkok, Thailand, is without legal basis and therefore erroneous. You allege that Mr. Cabugao is considered a non-resident citizen for the period January 1, 1998 to June 30, 1999 under Section 22(E)(3) of the Tax Reform Act of 1997. Such being the case, you assert that he is not taxable on his compensation income derived during such assignment as Regional Audit Manager for Asia-Pacific Region based in Bangkok, Thailand by Caltex Corporation covering the period hereinbefore stated. prcd We affirm. Section 22(E)(3) of the Tax Code, as amended by Republic Act No. 8424, states that the term "non-resident citizen" means "a non-resident of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year." The phrase "most of the time" has been settled to mean being away for 183 days or more. (BIR Ruling No. 050-80 dated May 13, 1980). Considering that the period October 1997 to June 30, 1999 is definitely more than 183 days, and considering further that the Tax Reform Act of 1997 took effect only on January 1, 1998, then it is our opinion that indeed Mr. Cabugao, under the provisions of Section 22(E)(3) of the Code, was a non-resident citizen from January 1, 1998 to June 30, 1999. Section 23(B) of the Tax Code, as amended, unequivocally states the rule that a non-resident citizen is taxable only on income derived from sources within the Philippines. By correlation with Sections 42(A)(3) and 42(C)(3) of the Tax Code, compensation for labor or personal services performed in the Philippines constitutes income from sources within the Philippines, while compensation for labor or personal services performed without the Philippines constitutes income from sources without the Philippines. Further to this, Section 22(E)(4) of the Code states the rule that a citizen who has been previously considered as a non-resident citizen and who arrives in the Philippines at anytime during the taxable year to reside permanently in the Philippines shall still be treated as a non-resident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. Applying the stated rules to the given facts, we accordingly confirm that pursuant to Section 23(B) in relation to Sections 22(E)(3) & (E)(4) and 42(A)(3) and 42(C)(3) of the Tax Code of 1997, Mr. Cabugao was a nonresident citizen from January 1, 1998 to June 30, 1999, and therefore, he is not subject to income tax on his compensation income derived during his assignment as such Regional Audit Manager for Asia-Pacific Region in Bangkok, Thailand by Caltex Corporation for the said period January 1, 1998 to June 30, 1999, the date of his arrival in the Philippines. Consequently, no withholding tax should have been collected by CPI on the said compensation income during the period covering January 1, 1998 to June 30, 1999. This ruling is being issued on the basis of the facts represented. If, however, it is found out, upon investigation, that the facts are different, then this ruling shall be considered null and void and therefore, of no legal effect. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)