Isla Lipana & Co.

November 12, 2008 BIR RULING [DA-(C-132) 420-08] 22 (E) (3) & (4); 23 (B); RR 2-98; DA-031-08, DA-575-07 Isla Lipana & Co. 29/F Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty. Mary Assumption S. Bautista-Villareal Partner Tax Services Gentlemen : This refers to your letter dated July 10, 2008 on behalf of your client, RCG Information Technology (Philippines), Inc. (RCG IT Phils.) requesting confirmation on specific issues relative to the tax treatment of Filipino employees assigned abroad for 183 days or more during a given taxable year. DcCITS The facts as represented are as follows: RCG IT Phils. provides IT solutions and services, specifically IT strategy and design application development, integration and management which are delivered on-site, off-site and/or offshore. Operating in a dynamic and robust industry, RCG IT Phils. seeks to create a dynamic environment to keep its consultants ahead of the curve. To ensure that this is possible, the consultants are assigned abroad not only to generate and transfer knowledge and develop their global leadership skills, but more importantly, to keep up with the global business strategy and demands of the business. The pertinent circumstances involving the offshore posting of the consultants are as follows: The consultants are assigned to RCG IT in the United States of America (US). The consultants are physically present in the US for 183 days or more during a given taxable year. As employees of RCG IT Phils., their compensation remains to be paid in the Philippines. The consultants receive a per diem (in US dollars) from RCG IT for their transportation, communication and meal expenses. In certain cases, the consultants are able to obtain US green cards; hence, they become obligated to pay taxes in the US as a permanent resident. Based on the foregoing representations, you are requesting confirmation of the following: 1. The consultants of RCG IT Phils., regardless of entry visa issued by the foreign host country, who have worked outside the Philippines for 183 days or more during the taxable year are considered non-resident citizens; IDEScC 2. As non-resident citizens, the compensation paid to these consultants pertaining to their services abroad, whether paid in or outside the Philippines, is considered foreign source income; hence, exempt from income tax and consequently, from withholding tax on compensation; and 3. Any compensation received by the non-resident consultants upon their return to the Philippines in consideration of their services in the Philippines is already subject to income tax. We proceed to rule on the particular issues raised for our consideration. 1. Section 22 (E) (3) of the Tax Code, as implemented by Revenue Regulations (RR) No. 9-99, has defined the term "non-resident citizen" as follows: "(1) . . . (2) . . . (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." (Emphasis supplied) In relation to this, Section 2 (c) of Revenue Regulations (RR) 1-79 clarified the interpretation of the phrase "most of the time during the taxable year" as follows: ". . . To be considered physically present abroad most of the time during the taxable year, a contract worker must have been outside the Philippines for not less than 183 days during such taxable year. " IcADSE Thus, consultants of RCG IT Phils. who are working outside the Philippines and are physically present abroad for 183 days or more during a taxable year shall be considered non-resident citizens during such year, regardless of entry visa issued by the foreign host country. 2. Corollary thereto, Section 23 (B) of the Tax Code, as amended, provides for the tax treatment of non-resident citizens, as follows: "(A) . . . (B) A non-resident citizen is taxable only on income derived from sources within the Philippines. (C) . . ." Moreover, Section 42 (C) (3) of the same Code provided the following: "(C) Gross Income From Sources Without the Philippines. The following items of gross income shall be treated as income from sources without the Philippines: (1) . . . (2) . . . (3) Compensation for labor or personal services performed without the Philippines; (4) . . ." This was further reiterated in Section 2.78.1 (A) (10) of RR 2-98, as amended, which laid down the basis for determining the situs of the income, to wit: "(10) Compensation for services performed outside the Philippines . . . In general, the situs of income, whether within or without the Philippines, is determined by the place where the service is rendered." aITECA Accordingly, applying the stated rules to the given facts, the compensation received by the non-resident consultants pertaining to their services abroad shall be considered foreign source income which is exempt from income tax and consequently, from withholding tax on compensation in the Philippines (BIR Rulings DA-031-08, DA-575-07, DA-091-04, DA-262-03 and BIR Ruling No. 013-03). Further, the fact that their salaries are paid here in the Philippines does not mean that they do not derive income from abroad, as the situs of the compensation income is the place where the services are rendered (BIR Rulings DA-031-08, 013-03, DA-208-02) . 3. On the other hand, any compensation that will be received by the non resident consultants upon their return to the Philippines in consideration of their services in the Philippines shall be considered Philippine source income subject to income tax pursuant to Section 22 (E) (4) of the Tax Code, as amended, to wit: "(4) A citizen who has been previously considered as a nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident 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." In BIR Rulings DA-314-04 and 005-95, this Office ruled that a non-resident citizen who is physically present in the Philippines shall resume tax residence in the Philippines; hence, shall be subject to Philippine income tax. 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service