Compensation Income of a Foreigner Earned from Services Rendered in the Philippines subject to Philippine Income Tax

April 14, 1997 BIR RULING NO. 044-97 R.S. Bernaldo & Associates Unit 1810 Cityland Condominium 10 Tower 1 6815 Ayala Avenue cor. R.V. dela Costa Ext., 1200 Makati City Attention: Atty . Rosario S . Bernaldo General Manager Gentlemen : This refers to your letter dated March 21, 1995 requesting for a ruling as to whether the compensation income of a foreigner earned from services rendered in the Philippines is subject to Philippine income tax. It is represented that Mr. Thomas Crowley was assigned by your client, Oil Drilling & Exploration (International) Pty. Limited (ODE), a foreign corporation licensed to do business in the Philippines through its registered branch office, to oversee a one year contract which it had entered into with the Philippine Geothermal, Inc. (PGI) to provide drilling services to the latter in its geothermal plants; that said Mr. Crowley is a resident of New Zealand and was assigned in the Philippines for an aggregate period of 170 days; that the salaries and compensation of Mr. Crowley for his services in the Philippines would be paid and borne by the parent office of ODE in Australia; and that the branch office will not pay nor accrue the said salaries in its books in the Philippines. In reply, please be informed that in relation to Section 23(b) (6) of the Tax Code, as amended, Article 15(1) of the Tax Treaty between the Governments of the Republic of the Philippines and New Zealand, which entered into force on February 16, 1982, provides that . . . "salaries, wages and other similar remuneration derived by an individual who is a resident of one of the Contracting States in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State." However, it should be noted that the above quoted provision of the RP-New Zealand Tax Treaty is subject to the following conditions as provided for under Article 15(2) of the same Tax Treaty, which reads: "(2) Notwithstanding the provisions of paragraph 1, remuneration derived by an individual who is a resident of one of the Contracting States in respect of an employment exercised in the other Contracting State shall be taxable only in the first mentioned State if "a) the recipient is present in that other State for a period or periods not exceeding in the aggregate 183 days in the year of income or fiscal year, as the case may be, of that other States, and "b) the remuneration is paid by, or on behalf of an employer who is not a resident of that other State, and "c) the remuneration is not deductible in determining the taxable profits of a permanent establishment or a fixed base which the employer has in that other State ." Based on your representations, it is observed that Mr. Crowley was assigned in the Philippines for an aggregate period of 170 days, and his remuneration was paid and borne by the parent office of ODE in Australia. And although it may be argued that ODE maintained a branch office here in the Philippines, which for purposes of the RP-New Zealand Tax Treaty is considered as a "permanent establishment" pursuant to Article 15(2) of the said Tax Treaty, the said branch office nevertheless must not pay nor accrue the said salaries in its books of accounts, hence, the aforesaid three conditions imposed under the aforequoted Article 15(2) of the subject Tax Treaty have been sufficiently met and complied with. In view of all the foregoing, we hereby confirm your opinion that the compensation income received by the said Mr. Thomas Crowley for services rendered in the Philippines is not indeed subject to Philippine income tax pursuant to the provisions of Article 15(1) and (2) of the RP-New Zealand Tax Treaty in relation to Section 28(b) (6) of the Tax Code, as amended. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it is discovered that the facts are different from the said representations, this ruling shall be considered null and void from the date of issue. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue