Diaz Murillo Dalupan & Co., CPA's

September 5, 2008 BIR RULING [DA-(C-059) 198-08] Sec. 32 & 78; RR 2-98; S-30-022-07 Diaz Murillo Dalupan & Co., CPA's 5/F, Don Jacinto Bldg., Dela Rosa cor. Salcedo Sts. Legaspi Village, Makati City Attention: Atty. Bethuel V. Tanupan, CPA Partner, Tax & Corporate Services Division Gentlemen : This refers to your letter dated August 13, 2007 requesting on behalf of your client, Voluntary Service Overseas (VSO) Bahagian Foundation, Inc. ("the Foundation" for brevity), confirmation of your opinion that payments made to volunteers are not considered as compensation income and therefore not subject to income tax and consequently to withholding tax. ECSHAD It is represented that the Foundation is a nonstock, nonprofit corporation registered with the Securities and Exchange Commission (SEC) on April 22, 2003. It is an international development charity that works through volunteers. It is chiefly dependent on the grants to be given by its head office in United Kingdom. The purposes of the Foundation are the following: "to bring people together to share skills, creativity and learning to build a fairer world, to raise awareness on development issues and advocate for means to tackle disadvantages, to link programmes and organizations, and facilitate the networking and alliance building, and to provide support for local and national volunteering exchanges of volunteers." The Foundation pays for its volunteers on end of service grants. These expenses are paid by the VSO Programme offices where the volunteers were placed. End-of-service grants are processed in the Philippines unless otherwise determined by the programme official. The grant is processed once the end-of-service forms and grant forms have been forwarded to the Foundation. The following grants, which represent fund remittances from its head office to finance the activities and accomplish its objectives and purposes, are given to the volunteers: ITcCaS 9.1 Cold weather grants are additional grants paid to volunteers on top of the pre-departure grant if placement is to countries listed as having cold temperature ( i.e., Mongolia) therefore purchases of suitable clothes are needed. 9.2 Hardship grants are given to volunteers bound to their placement who have already resigned in their jobs but for reason not their own doing, departure was delayed. 9.3 Pre-departure grants are given to volunteers pay for things they may need to take to the placement. 9.4 Quarterly grants. 9.5 Accommodation costs to get VISA are costs incurred to secure volunteer VISA. DTESIA 9.6 Air Fare International pertains to payment to volunteer's air fare. 9.7 Meals, other costs to get VISA, and travel-domestic pre-departure are incidental reimbursements incurred by volunteer in securing VISA 9.8 VISA's and permits are payments for volunteer's VISA. It is your opinion that the different grants above-mentioned are not subject to withholding tax on the basis that there is no employer-employee relationship between the Foundation and its volunteers. The terms of volunteers normally last at most for two (2) years but there are others which last for only five (5) months to one (1) year. The foregoing is a manifestation that there is no regularity in the activity since the Foundation is chiefly dependent on the grants to be given by its head office in United Kingdom. In reply, please be informed as follows: Section 2.78.1 (A) of Rev. Regs. No. 2-98, as amended, otherwise known as the Withholding Tax Regulations implementing Section 78 of the Tax Code of 1997, as amended, in relation to Section 32 (A) (1) thereof, provides: "Sec. 2.78.1. Withholding of Income Tax on Compensation Income. (A) Compensation Income Defined In general, the term "compensation" means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code. The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria, allowances, commissions ( e.g., transportation, representation, entertainment and the like), fees including directors, fees, if the director is at the same time, an employee of the employer/corporation: taxable bonuses and fringe benefits except those which are subject to the fringe benefits tax under Section 33 of the Code; taxable pensions and retirement pay; and other income of a similar nature constitute compensation income. . . ." Please note that the withholding tax on compensation income is a method of collecting the income tax at source upon receipt of the income. It applies to all employed individuals whether citizens or aliens, deriving income from compensation for services rendered in the Philippines. The employer is constituted as the withholding agent. HIACac In the instant case, however, considering that the workers of the Foundation are rendering their services on a voluntary basis only, they are not considered as regular employees of the organization because the requisite of an employer-employee relationship is absent in the said arrangement. The grants/allowances that the volunteers received in the course of performing the objectives and purposes of the said organization, not being regarded as compensation in the sense used under Section 32 (A) (1) of the Tax Code of 1997, as amended, and Section 2.78.1 (A) of Rev. Regs. No. 2-98, as amended, implementing Section 78 of the same Tax Code, are exempt from income tax imposed under Sections 24 and 25 of the Tax Code, and consequently, from the withholding tax imposed under Rev. Regs. No. 2-98, as amended. (BIR Ruling No. S-30-022-2007 dated May 24, 2007) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service