BIR Ruling No. 020-09

October 23, 2009 BIR RULING NO. 020-09 00-000 Human Resources Development Service of Korea Resident Office in the Philippines Unit 1607, Prestige Tower Bldg. Emerald Avenue, Pasig City Attention: Cho Youngil Director General Gentlemen : This refers to your letter dated October 12, 2009 requesting, in effect, for a ruling on the applicable tax treatment of the test fees to be collected by the Human Resource Development Service of Korea (HRD Korea) in the implementation of the Service Commitment Agreement of EPS-KLT between HRD Korea and the Philippine Overseas Employment Administration (POEA) pursuant to the Memorandum of Understanding between the Department of Labor and Employment (DOLE) of the Republic of the Philippines and Ministry of Labor of Korea (ML Korea). It is represented that last May 30, 2009, DOLE and ML Korea signed a Memorandum of Understanding on the Sending and Receiving of Workers under the Employment Permit System of Korea also known as "EPS." The signing of the Memorandum was witnessed by no less than the Presidents of the respective countries, Her Excellency Gloria Macapagal-Arroyo and His Excellency Lee Myung Bak. Under the Memorandum, DOLE assigned POEA, its attached agency, to exclusively serve as the sending agency of Filipino workers to Korea while ML Korea, on the other hand, designated HRD Korea, its affiliate agency, to exclusively serve as the receiving agency of the Filipino workers pursuant to the Foreign Employment Act of Korea. The signing of the Memorandum expressly terminated the previous Memorandum of Understanding dated October 20, 2006 between DOLE and ML Korea and the Implementing Agreement on the EPS-KLT signed in August 2005. As the sending and receiving agencies, POEA and HRD Korea, respectively, were mandated to sign a Service Commitment Agreement of EPS-KLT (Korean Language Test) which will regulate specific matters regarding the implementation of the EPS-KLT. However, the signing of this Agreement and the deployment of Filipino workers to Korea have been put on hold for almost two years now due to unresolved issues on the taxability of the KLT Test Fee and on the Custom Clearance and Exemption of the test materials and effects which will be imported from Korea to Philippines. It is also represented that passing the KLT is one of the most important qualification requirements for a Filipino's employment in Korea. Under Sections 1 to 3 of Article 13 of the draft Agreement, the test fee of $17.00 for the KLT, however, is being subject to tax based on an earlier opinion issued by the Bureau of Internal Revenue in its letter to POEA dated November 5, 2008 which stated that the test fee is subject to both Philippine income tax and value-added tax (VAT). According to you, the administration of the KLT is subsidized in great deal by ML Korea and that the $17.00 test fee being collected is only for the purpose of reimbursing part of the actual cost of expenses incurred in the conduct of the KLT, such as the printing of test materials, purchase of audio visual aid like cassette tapes, rental of test venues, allowances of proctors and test facilitators, official trip of officials, publicity fee etc. You also claim that as a government agency attached to ML Korea, HRD Korea does not earn any income in the conduct of the KLT, thus, the imposition of income tax and VAT on the test fee is not clear to you. ITADaE Based on the foregoing, you now seek a reconsideration of the opinion of this Office on the tax treatment of the test fees to be collected by HRD Korea for the conduct of the KLT. After a careful review of the facts of case and the applicable laws thereto, and in the interest of comity and cooperation, we reconsider. The instant case involves a Memorandum of Understanding between two governments, thus, we believe that the principles of international law should be properly applied. As a member of the family of nations, the Philippines agrees to be bound by generally accepted rules for the conduct of its international relations. Article II Section 2 of the 1987 Philippine Constitution no less adopts the generally accepted principles of international law as part of the law of the land. International comity is a principle of international law relating to rules of international courtesy, etiquette, or good-will which are in fact, or which ought to be, observed by states in their mutual relations. In Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc., et al., [209 SCRA 87 (1999)], it was held that international comity may manifest itself in various forms such as the practice of diplomatic protocol and extradition even in the absence of a definitive treaty on the matter. Thus, although there is no definitive treaty between Philippines and Korea on the sending and receiving of Filipino Workers to Korea, the execution of a Memorandum between the two governments qualifies for the application of the principle. Under international comity, a state must recognize the generally accepted tenets of international law, among which are the principles of sovereign equality among states and of their freedom from suit without their consent. This principle, therefore, limits the authority of a government, i.e., the Philippine Government, to effectively impose taxes on a sovereign state and its instrumentalities, as well as on its property held, and activities undertaken, in that capacity. Considering that the test fees are being collected by HRD Korea, which is a government agency of a sovereign state, i.e., the Republic of Korea, solely for the purpose of partially reimbursing the cost of the KLT, which is in turn administered as an essential feature of the Service Contract Agreement of EPS-KLT between DOLE and ML Korea, the principle of international comity shall apply. Accordingly, this Office is of the opinion as it hereby holds that pursuant to this principle, the test fees to be collected by HRD Korea are not subject to Philippine income tax and VAT. 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 as represented are different, then this ruling shall be considered null and void. EHaCID Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Commissioner of Internal Revenue