J-SYS Philippines

April 24, 2009 BIR RULING [DA-(C-060) 212-09] 22 (E) (3); 23 (C); #033-2000 J-SYS Philippines JGC Phil. Bldg., 1606 Trade St. cor. Investment Drive Madrigal Business Park, Ayala Alabang, Muntinlupa City Attention: Ms. Myrna G. Reyes Vice President-Administration & Treasurer Gentlemen : This refers to your letter requesting for a ruling on the proper tax classification of employees assigned overseas under a Secondment Agreement. Background J-SYS Philippines, Inc. (JPI) is a domestic corporation engaged in the systems design and development, a systems integrator rendering services to Japanese companies overseas and in the Philippines. The bulk of JPI's revenue comes from work order contracts for systems design, development and programming being awarded by its main client and parent company, JGC Information Systems Co., Ltd. (J-SYS). Seventy percent (70%) of JPI's projects are done overseas and about Thirty percent (30%) are done in the Philippines. Thus, the qualified Filipino systems programmers and analysts of JPI are sent to Japan or to other JGC sites in Asia-Pacific and Europe under a Secondment Agreement with JPI's client and covered by Intra-Company Transference Visas. The seconded employees are stationed at the JGC offices for a certain period of time and shall perform their duties according to the client's instructions and without losing the status of employment with JPI. Further, J-SYS provides for the accommodation, transportation, meal and site allowances and other basic necessities while on overseas assignment. Their salaries in Philippine Pesos are being paid here in the Philippines by JPI thru its depository banks. Consequently, and as stated in the Secondment Agreement, the manhour spent by the overseas assignees are billed to client at an agreed manhour billing rate based on their position, level and salaries. Client in turn remits the payment in US$ and JPI converts the same to Pesos through the Philippine banking system. In effect, the client or J-SYS is actually the one paying the salaries of overseas assignees through JPI. For income tax purposes, the employees of JPI who are assigned overseas for at least 183 days in a taxable year were classified as non-residents since the situs of income whether within or without the Philippines was determined by the place where the service was rendered. The income, thus earned, even if paid locally, were taxed based on the preferential rates of 1-2-3% before taxable year 1998. TADCSE In reply, please be advised that Section 23 (C) of the Tax Code of 1997 which took effect on January 1, 1998, as amended, provides as follows: "(C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income from sources within the Philippines. . ." Corollary thereto, Section 22 (E) (3) of the same Code provides one of the definitions of the term 'non-resident citizen' of the Philippines, viz.: "(3) A citizen 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." Thus, for purposes of exemption from income tax, a citizen must be deriving foreign-sourced income for being a non-resident citizen or for being an overseas contract worker (OCW). All your employees whose services are rendered abroad for being seconded or assigned overseas for at least 183 days may fall under the first category and are therefore exempt from payment of 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. (Sec. (2) (c), Rev. Regs. 1-79, as amended) The same exemption applies to an overseas contract worker but as such worker, the time spent abroad is not material for tax exemption purposes. (BIR Ruling No. 033-2000 dated September 5, 2000) Therefore, JPI may recognize the income tax exemption of its employees assigned abroad based on either of the foregoing premises. 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