Applicability of RMO No. 41-97, Prescribing the Policies and Procedures in the Implementation of Operation "Even Returns"

March 6, 1998 BIR RULING NO. 025-98 RMO No. 41-97 000-00-25-98 Laya Mananghaya Salgado & Co. 22/F Antel 1000 Corporate Centre 139 Valero St., Salcedo Village Makati City Attention: Atty . Mariano C . Ereso , Jr . Gentlemen : This refers to your letter dated November 4, 1997 requesting confirmation of your opinion that Revenue Memorandum Order (RMO) No. 41-97, Prescribing the Policies and Procedures in the Implementation of Operation "Even Returns" will not apply to any of the following scenarios: 1. Compensation withholding tax for taxable year 1995 and prior years; cdlex 2. Individual income tax returns of expatriates voluntarily filing their returns but whose salaries are credited and received offshore; 3. Entities voluntarily remitting withholding tax on behalf of alien individuals who are not their employees and do not have control over the payment of the compensation of said alien individuals; and 4. Individual income tax returns of expatriates who are employed locally by a Philippine entity but who also receive income from an offshore employer. In reply, please be informed that your aforementioned opinion is hereby confirmed. Thus: cdll "1) RMO 41-97 applies only to withholding tax on compensation pertaining to taxable year 1996. It does not apply to compensation withholding tax for taxable year 1995 and prior years. Part III of the RMO specifically provides the steps in implementing the said program of the BIR. It should be noted that the intent of the program is to cover only the returns for 1996 as it intends merely to increase voluntary compliance to the correct withholding of taxes on compensation. Part III, No. 1 of the RMO specifically provides for the gathering only of the 1996 returns. Thus, an assessment issued on the basis of Operation "Even Returns" covering taxable year 1995 and prior years is without legal basis and should not be given due course. RMO 41-97 provides further that Operation "Even Returns" activity ends on August 29, 1997. The issuance provides a specific and unqualified termination date for the whole activity. Thus, after the termination date, it ceases to be the basis for the issuance of any letter or notice in connection with the operation. Moreover, the Operation is merely a compliance program of the BIR which is specific as to duration and coverage. Since the RMO provides specifically that only 1996 returns are covered, it should not be made effective even to prior taxable years. "2) RMO 41-97 does not cover individual income tax returns of expatriates voluntarily filing their returns but whose salaries are credited and received offshore. These individuals who are employed by offshore entities and do not have any domestic employer who shall be liable for remittance of withholding tax should be excluded from the coverage of RMO 41-97, even if a local entity voluntarily remits taxes on their behalf as an accommodation withholding agent. "3) RMO 41-97 should not cover entities voluntarily remitting withholding tax on behalf of alien individuals who are not their employees and do not have control over the payment of the compensation of said alien individuals. Section 71(d) of the NIRC clearly defines "employers" which are constituted as withholding agents, thus: LLpr "The term "employer" means the person for whom an individual performs or performed any service, of whatever nature, as the employee of such person, except that: (1) If the person from whom the individual performs or performed any service does not have control of the payment of the wages for such services, the term "employer" [except for purposes of subsection (a)] means the person having control of the payment of such wages; and (2) In the case of a person paying wages on behalf of a non-resident alien individual, foreign partnership or foreign corporation, not engaged in trade or business within the Philippines, the term "employer" [except for purposes of subsection (a)] means such person." A local entity which merely advances funds to cover individual income taxes for expatriates who are not its employees, and which does not have any control or connection whatsoever with the offshore payment of the aliens' salaries is not considered as a withholding agent based on the foregoing provisions of the Tax Code, as amended. LexLib Such local entity which merely provides a means of remitting taxes for the expatriates as an accommodation, in order to ensure that these expatriates will pay their Philippine taxes and to relieve them of the burden of paying in lump sum, a big amount of money prior to their departure, is not a legally constituted withholding agent by its acts of accommodation. In essence such an accommodation withholding agent is merely a remitting agent since even if the expatriates desire to remit withholding taxes, they cannot do so on their own behalf. Such a remitting agent should not be penalized for allowing the advance collection and remittance of individual income taxes from expatriates. "4) RMO 41-97 should not cover the individual income tax returns of expatriates who are employed locally by a Philippine entity but who also receive income from an offshore employer. There are instances where an alien individual is assigned to the Philippines to a Philippine employer and is compensated by the latter, as well as by his home office. The home office compensation is credited to the alien individual's offshore account. In this scenario, the local employer does not have any control over the offshore compensation. While the total compensation received may be reported for Philippine individual tax purposes, it will be impossible for the local withholding agent to fully withhold compensation income tax on the expatriates total income since the local entity does not have any control or information on the offshore payments until the offshore office advises the local entity as to the total amount of compensation paid." prLL Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue