Tax Consequence of Salaries Received

March 29, 1990 BIR RULING NO. 040-90 21 (b) 043-89 040-90 Gentlemen : This refers to your letter dated January 12, 1990 requesting in behalf of your client, Kruistochten Asia, Inc., a ruling on the tax consequence of salaries received by their employees in HongKong. It is represented that Kruistochten Asia, Inc. (KAI) is a domestic non-stock, non-profit religious corporation; that prior to its organization in the Philippines in 1989, KAI has been operating in HongKong where it maintains a number of employees; that it decided to make the Philippines as its principal ministry legal base of operations and as a result thereof, KAI deemed it necessary to establish formal work relationship with its employees in HongKong; that KAI employs three (3) categories of personnel in HongKong, to wit: casia 1. Filipino salaried Filipino employees based either in the Philippines or HongKong. The Filipino employees were sent to HongKong by KAI (Manila). 2. Non-Filipino salaried Non-Filipino Nationals rendering services in HongKong. 3. Non-Filipino, non-salaried There are Non-Filipino, non-salaried individuals who volunteer their services for free but are reimbursed by KAI for their expenses related to their assigned responsibilities. that your client has prepared the corresponding contracts for the respective types of employees above-described in order to establish a formal relationship between the individual employee and the organization and to establish the eligibility of the individual employee in disbursing KAI funds as required by the Central Bank of the Philippines. In reply, please be informed that KAI's Filipino employees who were sent to work in HongKong may either be permanent or contractual. They are considered permanent if they leave the Philippines to reside abroad on a more or less permanent basis, (whether or not his stay abroad is less than 183 days); and contractual if they leave the Philippines on account of a contract of employment which is renewed from time to time within or during the taxable year under such circumstances as to require him to be physically present abroad most of the time during the taxable year, which means staying abroad for not less than 183 days during the taxable year. (Sec. 2, Revenue Regulations No. 1-79 dated January 8, 1979; BIR Ruling No. 043-89) Permanent or contractual employees (who stayed abroad for not less than 183 days during the taxable year) shall be considered non-resident citizen with respect to the income derived in HongKong, which means that such income shall be subject to the preferential tax rate on the adjusted gross income pursuant to Section 21(b) of the Tax Code. Likewise, Filipinos who are already residents of HongKong when hired by KAI shall be considered non-resident citizens subject to Philippine income tax under Section 21(b) of the Tax Code and to the withholding tax on compensation of a citizen for services performed outside the Philippines under Section 7.11 of Revenue Regulations No. 6-82. (BIR Ruling No. 503-88) Contractual Filipino employees of KAI whose stay abroad is less than 183 days shall be taxable as resident subject to the graduated income tax rate under Section 21(a) of the Tax Code. However, non-Filipino Nationals, whether salaried or non-salaried, working for KAI in HongKong, being outside the taxing jurisdiction of the Philippines, are not subject to Philippine income tax. cdtech Very truly yours, (SGD.) JOSE U. ONG Commissioner