Income Taxes Paid to Indonesian Govt. by Filipinos in Indonesia Not Applied as Tax Credit Against Their Phil. Income Tax

June 26, 1985 BIR RULING NO. 104-85 30-c 000-00 104-85 Gentlemen : This refers to your letter dated April 12, 1985 requesting a ruling on whether income taxes paid to the Indonesian Government by Philippine citizens residing in Indonesia can be applied as tax credit against their Philippine income tax. cdta It is represented that your client, Freeport Indonesia, is a foreign company employing Philippine citizens in its operation in Indonesia; that their stay therein vary from one year to four years; and that the Philippine employees pay income taxes on compensation income derived from their employment in Indonesia both to the Indonesian and to the Philippine Governments. In reply, please be informed that your request is answered in the negative. Tax Credit refers to the taxpayer's right to deduct from the income tax due the amount of tax he has paid to a foreign country subject to limitations. It is allowed to lessen the rigor of international double or multiple income taxation. It may also refer to the amount which is allowed as a reduction of Philippine income tax. (Teodoro and De Leon, the Law on Income Taxation, 5th Ed., 1981, p. 118) To support the contention in favor of tax credit, you cited paragraph 2, Article 23 of the Tax Treaty which provides as follows: "Subject to the provisions of the laws of the Philippines relating to the allowance as credit against Philippine tax of tax payable in any country other than the Philippines, Indonesian taxes paid or accrued under the laws of Indonesia and in accordance with this Agreement, whether directly or by deduction, in respect of income from sources within Indonesia shall be allowed as a credit against Philippine tax payable in respect of that income." It is noted that the allowance of tax credit for income tax paid to a foreign country is subject to the provisions of Section 30(c) of the Tax Code (Sec. 31, Revenue Regulations No. 3-83 implementing the RP-Indonesian Tax Treaty). However non-resident citizens are given special tax treatment in the sense that the tax rates i.e. 1% to 3% applicable to them are already very low. In other words, double or multiple taxation is minimized if not eliminated; hence, they are no longer allowed to claim tax credit for income tax paid to a foreign country (Revenue Memorandum Circular No. 17-73). Moreover, under the RP-Indonesia Tax Treaty, it is provided that "2. Nothing in this Agreement shall be construed as preventing the Philippines from taxing its citizens who may be residing in Indonesia in accordance with its domestic legislation. However, no credit shall be given for taxes paid pursuant thereto." (Miscellaneous Rules Par. 2 Article 29). Our domestic legislation provides that non-resident citizens of the Philippines are subject to tax upon the adjusted gross income derived by them from all sources without the Philippines at the rate of 1%, 2%, or 3%. "Adjusted gross income" means the gross income from all sources without the Philippines less (1) the allowance for personal exemption, and (2) the total amount of the national income tax actually paid to the government of the foreign country of his residence. [Sec. 21(f), Tax Code] Under this provision, a non-resident citizen who earns income abroad is entitled to deduct the taxes he paid to the foreign government to arrive at the adjusted gross income upon which Philippine income tax is based. This is, therefore, a form of tax credit because it ultimately reduces the Philippine income tax. As regards the second sentence of Paragraph 2, Article 29, which reads: "However, no credit shall be given for taxes paid pursuant thereto," it means that whatever taxes paid by Philippine citizens residing in Indonesia to the Philippine Government pursuant to the said treaty provision shall not be allowed as a credit against their income taxes payable to the Indonesian Government. Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner