Punongbayan & Araullo

September 19, 2008 BIR RULING [DA-(C-074) 239-08] DA290-05 Punongbayan & Araullo 20th Floor, Tower I The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty. Raymund S. Gallardo Partner Gentlemen : This refers to your letter dated March 17, 2008 stating that your client, Blaze Manufacturing Corporation (Blaze), a corporation organized under Philippine laws and duly registered with the Philippine Economic Zone Authority (PEZA) as an export enterprise engaging in the manufacture of blocks made of mortar with ducts (hi blocks) and other related goods; that it is currently operating at Mactan Economic Zone (MEZ) II, Basak, Lapu-Lapu City, Cebu; that Mr. Masao Koike is a Japanese citizen and President of Blaze; that as the President of Blaze, he stays most of the time in the Philippines in any given taxable year; that he has been involved with the Company since 1996 when it was incorporated; that when Blaze started its operations in February 1998, he has served as its Vice President and subsequently, on October 28, 1998, obtained a special non-immigrant visa; that he is required to be present in the Philippines for most of the time since he manages its day-to-day operations; that in fact, he was considered as a resident alien for Philippine income tax purposes pursuant to BIR Ruling No. DA290-05 dated June 27, 2005; that aside from being the President of Blaze, Mr. Koike also holds the position as President of Yoshi Corporation, a non-resident foreign corporation based in Japan; that in the course of the performance of his functions as President of Yoshi, Mr. Koike visits Yoshi in Japan five (5) to six (6) times in a year; that he stays in Japan for an average of seven (7) to ten (10) days per visit; that as President of both Blaze and Yoshi, Mr. Koike receives monthly compensation from the two (2) companies; that the compensation received from Blaze was properly subjected to withholding tax on compensation based on the graduated tax rates of 5% to 32% pursuant to Section 24 (A) (1) (c) of the Tax Code of 1997, as amended; and that on the other hand, compensation received from Yoshi for the services performed in Japan was not subjected to Philippine income tax because it is considered as income derived from sources outside the Philippines. Based on the foregoing representations, you now request for confirmation of your opinion that the compensation received by Mr. Koike as President of Blaze from sources within the Philippines is taxable only in the Philippines while his income as President of Yoshi is not subject to Philippine income tax and consequently to withholding tax on compensation. In reply thereto, please be informed that this Office had already occasioned to rule on the matter, when it said in BIR Ruling No. DA290-05 dated June 27, 2005, as follows: ". . . Section 22(F) of the Tax Code of 1997 defines the term 'resident alien' as an individual whose residence is within the Philippines and who is not a citizen thereof. Conversely, Section 5 of Regulations No. 2, otherwise known as the Income Tax Regulations defines a 'non-resident alien individual' as an individual EcHaAC (a) Whose residence is not within the Philippines; and (b) Who is not a citizen of the Philippines. An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of the income tax. Whether he is a transient or not is determined by his intentions with regard to the length and nature of his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him a transient. If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient. But if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned." A careful scrutiny of the above-cited laws disclosed that Mr. Koike is considered a resident alien for purposes of his income tax liability in the Philippines as he has passed the requisites for a resident alien. As represented, he has been involved with the Company since 1996 when it was incorporated. In fact, when Blaze started its operations in February 1998, he has served as its Vice President and subsequently on October 28, 1998, obtained a special non-immigrant visa. Moreover, being the President of the Company he is required to be in the Philippines most of the time since he manages the day-to-day operations. . . . this Office holds that he is deemed a resident alien for Philippine income tax purposes." Accordingly, having established that Mr. Koike's status as a resident alien, his compensation therefore derived from performance of his functions as President of Blaze shall be subject to Philippine income tax, and consequently to withholding tax, at the rate of 5% - 32% as provided under Section 24 (A) (1) (c) in relation to Sections 23 (D) and 42 (A) (3) of the Tax Code of 1997. On the other hand, Compensation for services rendered in Japan by a resident alien is considered income from sources derived outside the Philippines, hence, not subject to income tax and consequently to withholding tax on compensation. Thus, Section 42 (C) (3) of the Tax Code of 1997 enumerates the items of income that are treated as derived from sources outside the Philippines, to wit: "(C) Gross Income from Sources Without the Philippines The following items of gross income shall be treated as income from sources without the Philippines: aHcACT xxx xxx xxx (3) Compensation for labor or personal services performed without the Philippines; xxx xxx xxx" Since Mr. Koike performed his function as President of Yoshi in Japan, income derived from such services is considered income from sources outside the Philippines, hence, not subject to Philippine income tax and consequently to withholding tax on compensation. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service