Employees Assigned Abroad for 20 Months are "Non-resident Citizens" Exempt from Income Tax

October 13, 2003 BIR RULING NO. 013-03 101 22 (E) 000-00 DCCD Engineering Corporation SOL Office Condominium Building 112 Amorsolo Street, Legaspi Village 1229 Makati City Attention: Hermenegildo P. Manzano, Jr. Corporate Secretary and Treasurer Gentlemen : This refers to your letter dated May 21, 2001 requesting for a ruling on whether or not your regular employees assigned abroad qualify under the "non-resident citizen" status and are, therefore, exempt from income taxes and consequently from withholding taxes. It is represented that DCCD Engineering Corporation (DCCD) is a domestic corporation registered with the Securities and Exchange Commission. It is an integrated engineering consulting firm generating projects from local as well as from foreign sources both from the public and private sector. It was able to secure a water supply project in Phnom Penh, Cambodia requiring it to supervise for twenty (20) months the construction phase thereof. The regular compensation of the employees sent abroad including their thirteenth-month pay, project bonuses, sick leaves, vacation leaves and other benefits are paid here in the Philippines. In reply, please be informed of the following: Re: First Query Section 22(E) of the NIRC provides: "Sec. 22. Definitions . When used in this Title: xxx xxx xxx (E) The term 'nonresident citizen ' means: (1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. (2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. (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. (4) A citizen who has been previously considered as 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. xxx xxx xxx The regular employees you send to Phnom Penh, Cambodia to supervise the construction of the water supply project of said country may qualify as "nonresident citizens" of the Philippines under Section 22 (E) (3) of the NIRC of 1997, supra .,if their employment requires them to be present in that foreign country most of the time during the taxable year, i.e .,they stay there for at least one hundred eighty-three (183) days or more. 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 compensation income is the place where the services are rendered pursuant to Section 2.78.1 of Revenue Regulations No. 2-98, to wit: "Sec. 2.78.1 Withholding of Income Tax on Compensation Income xxx xxx xxx (10) C ompensation for services performed outside the Philippines . Remuneration for services performed outside the Philippines by a resident citizen of the Philippines for a domestic or a resident foreign corporation or partnership, or for a non-resident corporation or partnership, or for a non-resident individual not engaged in trade or business in the Philippines shall be treated as compensation which is subject to tax. A non-resident citizen as defined in these regulations is taxable only on income derived from sources within the Philippines. In general, the situs of the income whether within or without the Philippines, is determined by the place where the service is rendered." In view of the foregoing, said employees are not subject to income tax. Section 23(C) of the NIRC of 1997 provides: "(C) An individual citizen of the Philippines who is working and deriving income abroad as an overseas contract worker is taxable only on income from sources within the Philippines ...." 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 as null and void. DcAaSI Very truly yours, (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue