Tax Exemption Provision Contained in the Proposed Memorandum of Understanding Between the Philippines and Australia entitled "Mindanao Community Health Project"

June 10, 1997 BIR RULING NO. 071-97 22 (b) 25 (b) 000-00 071-97 Hon. Delia Menez-Rosal Acting Assistant Secretary Office of Asian and Pacific Affairs Department of Foreign Affairs 2330 Roxas Blvd., Pasay City M a d a m : This refers to your letter dated April 28, 1997 requesting this Office to comment on the tax exemption provision contained in the proposed Memorandum of Understanding (MOU) between the Philippines and Australia entitled "Mindanao Community Health Project". Documents submitted show that paragraph 11 of the aforesaid Memorandum of Understanding provides, to wit: " The Government of the Philippines will be responsible for the payment of income taxes and other similar taxes on fees, salaries, wages and other similar remuneration paid for by the Government of Australia and incurred by Australian personnel, firms, institutions and organizations derived from work performed under this Memorandum in the Philippines. Furthermore, Australian personnel and Australian firms, institutions and organizations will not be subject to these taxes on income derived from work performed outside the Philippines which income is not transferred into the Philippines." (Emphasis supplied) In reply, please be informed that the aforequoted provision of the proposed MOU between the Philippines and Australia entitled "Mindanao Community Health Project" is not a grant of direct tax exemption privilege to the Australian personnel, firms, institutions and organizations involved in the project because the said provision states that it is the Government of the Republic of the Philippines that is obligated to pay whatever income or other similar taxes that they may be liable to. Thus, there is no tax exemption to speak of because the said taxes shall be assumed by the Philippine Government; hence, the said provision is not violative of the Constitutional prohibition against grants of tax exemptions without the concurrence of the majority of the members of the Congress (Sec. 28(4), Art. VI, 1987 Philippine Constitution). However, the last sentence of the said tax provision relative to the taxes on income derived by the said Australian personnel form work performed outside the Philippines should be deleted because we have no jurisdiction over the income derived outside the Philippines by non-resident aliens not engaged in trade or business within the Philippines. On the other hand, the income of Australian firms derived from work performed outside the Philippines is covered by the Tax Treaty between the Philippines and Australia but only insofar as the Australian firm has a "permanent establishment" in the Philippines. aisadc In view thereof, and considering that the estimated contribution of the Government of Australia in this project is A$20,547,000 more than the estimated contribution of the Philippines and that the immediate beneficiary is not the Australian Government but the Philippine Government, particularly the Integrated Community Health Services Project of the Government (ICHSP), this Office interposes no objection on the said tax provision of the proposed MOU between the Philippines and Australia, and hereby recommends its approval but with limitations as regards the income derived outside the Philippines. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue