BIR Ruling No. 116-12

February 22, 2012 BIR RULING NO. 116-12 Secs. 22 (E); 23 (B) of the Tax Code; RR 2-98 Seentec Philippines, Inc. 19-C Burgundy Corporate Tower, No. 252 Sen. Gil Puyat Ave., 1220 Makati City Attention: Engr. Percival S. A-Ayo, RME Construction & Commissioning Gentlemen : This refers to your letter dated May 19, 2010 requesting an opinion on whether or not the regular employees of SEENTEC PHILIPPINES INC., who are assigned abroad, qualify as "non-resident citizens" under Section 22 (E) of the Tax Code of 1997. Documents submitted disclose that SEENTEC PHILIPPINES INC. ("SPI"), with TIN 007-019-255-000, is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) under Registration No. CS200806225 dated 24 April 2008; that SPI is also authorized by the SEC to do business under Republic Act No. 7042 or the Foreign Investments Act of 1991; that in its application to do business under the said Act, Seentec Co., Ltd. has a 99.184% foreign equity in SPI; that according to SPI's Articles of Incorporation, its primary purpose is to engage in boiler design and mechanical works with a secondary purpose of buying and selling construction materials and equipment such as but not limited to Boiler components and its auxiliary equipment without engaging in retail trade; that in its application with the SEC to do business under the Foreign Investments Act, SPI is engaged in the importation of Boiler Design in the Philippines for the purpose of detailing and exportation leading to fabrication of boiler components and accessories and deal with construction and mechanical works; that the company is still in its start up phase concerning Boiler Engineering in the Philippines; that the following personnel are employees of SPI who were sent under a "Training/Project Delegation Agreement" to the Host Company, Seentec Co., Ltd., particularly at its Head Office in Korea and at the project site in Saudi Arabia: Duration (Initial: 6 months, extended to 2 years) Name of Employee TIN Training From To Location Edwin Mendoza Andal 183-236-548 Korea/KSA Jan-05-2009 Sept-15-2010 Elias Gaqui Paras 929-800-922 South Korea Mar-19-2009 Mar-19-2011 Percival Sianen A-ayo 221-953-201 South Korea Mar-19-2009 Mar-19-2011 Gideon Ordas Molleno II 217-829-042 South Korea Apr-16-2009 Apr-16-2011 Ryan Paul D. Francisco 236-689-874 South Korea Feb-14-2009 Feb-14-2011 Jasmin Cusi Tejada 303-702-967 South Korea Jul-24-2010 Jul-24-2012 Christopher Ang Roces 251-360-427 South Korea Jul-24-2010 Jul-24-2012 Jerome R. Sevillena 207-849-730 South Korea Jul-24-2010 Jul-24-2012 Junmarc Mabalot Bacani 930-160-174 South Korea Jul-24-2010 Jul-24-2012 and that the Delegation Agreements between the Host Company and SPI, as Home Company, state that the pertinent SPI employee "will be the HOME COMPANY representative to the HOST COMPANY, to familiarize the engineering system of the HOST COMPANY, attend project orientation, technical meetings, visit to manufacturing plants and facilities of the HOST COMPANY" that the purpose of such assignment and training in the Host Company is to "give familiarization to the company set-up" in order to learn the engineering system needed for the operation of engineering design business upon returning to the Home Company; that said Agreements also provide that the above-listed employees will continue to receive their regular compensation from SPI as stipulated in their employment contracts. In reply thereto, Section 22 (E) of the NIRC provides: "Sec. 22. Definitions. When used in this Title: xxx xxx xxx (E) The term 'nonresident citizen' means: (1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. (2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. (3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. (4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. xxx xxx xxx" (Emphasis supplied) Prior to the foregoing provision defining a non-resident citizen, Section 2 of Revenue Regulations No. 01-79 1 dated January 8, 1979 enumerated those who are considered as non-resident citizens, to wit: "SEC. 2. Who are considered as non-resident citizens. The term "non-resident citizen" means one who establishes to the satisfaction of the Commissioner of Internal Revenue the fact of his physical presence abroad with the definite intention to reside therein and shall include any Filipino who leaves the country during the taxable year as: (a) Immigrant one who leaves the Philippines to reside abroad as an immigrant for which a foreign visa as such has been secured. (b) Permanent employee one who leaves the Philippines to reside abroad for employment on a more or less permanent basis. (c) Contract worker one who leaves 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. To be considered physically present abroad most of the time during the taxable year, a contract worker must have been outside the Philippines for not less than 183 days during such taxable year." Apparently, the current Section 22 (E) (3) was derived from the above-defined 'contract worker'. Stated otherwise, to be a non-resident citizen, one must leave on account of a contract of employment under such circumstances that require him to be physically present abroad most of the time. The phrase "most of the time" was construed to mean a period more than 183 days during the taxable year. This is aligned with the present provision of the Tax Code of 1997 that describes the non-resident citizen as a Philippine citizen who "works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time". In view of the foregoing and based on the circumstances of SPI's employees, they cannot be qualified as "non-resident citizen'' under Section 22 (E) (3) of the Tax Code of 1997. The listed personnel are employees of a domestic corporation who are only on temporary assignment abroad. From their employment contracts and Delegation Agreements, it appears that they do not have any intention to reside at the places where they are delegated to either as immigrants or on a permanent basis. Hence, they will not fall under the first and second classification. Under the third classification, in order for a citizen of the Philippines to be considered a "non-resident citizen", he must work and derive income from abroad and that his employment abroad requires him to be physically present abroad most of the time during the taxable year. The phrase "and whose employment thereat requires him to be physically present abroad" immediately follows the phrase "works and derives income from abroad" would mean that the Philippine citizens' employment abroad requires his presence there most of the time. This is significant such it is also consistent with the general principle of income taxation stated in Section 23 (C) of the Tax Code, where an individual citizen of the Philippines who is working and deriving income abroad as an overseas contract worker is taxable only on income from sources within the Philippines. The Delegation Agreement expressly states that the SPI employees were sent to the Host Company (Seentec Co., Ltd.), not under a Contract of Employment or pursuant to "work order contracts for design and engineering works for overseas projects", but to obtain knowledge in the management of an engineering company specializing in Boiler Systems and Piping Designs such as SPI and that the training that they underwent was to acquire familiarization of the concepts and processes as well as to gain knowledge in new technologies to help SPI cope with economic crisis considering that Host Company is engaged in the same line of business. Thus, the trainings and supervisory works carried out by the SPI employees cannot be considered 'rendering services' to the Host Company in Korea. SPI has certified the herein listed personnel as its regular employees under an employment contract and they remain as employees of SPI. Hence, their temporary delegation/assignment abroad does not make them employees of Seentec Co., Ltd. of Korea and the duration of their stay in Korea for more than 183 days not qualify them to be non-resident citizens for purposes of taxation. Section 2.78.3 of Revenue Regulations (RR) 2-98, as amended, defines an "employee" as an individual performing services under an employer-employee relationship. It further, states that an employer-employee relationship exists when the person for whom the services were performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished, but also as to the details and means by which such results are accomplished. The compensation that the aforementioned SPI personnel will continue to receive from SPI during their period of training cannot be considered as income derived abroad since they are not rendering service for another corporation, but compensation derived from services rendered under their employer-employee relationship with SPI. "Compensation Income" means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code. (BIR Ruling No. 043-01 dated September 21, 2001) Therefore, SPI, as the employer corporation, shall withhold income tax on said compensation income pursuant to Section 79 (A) of the Tax Code of 1997, as implemented by Revenue Regulations (RR) No. 2-98, as amended. In view of the foregoing, this Office is of the opinion and hereby holds that SPI's regular employees hereinabove named, do not qualify as "non-resident citizens" under the definitions laid down under Section 22 (E) of the Tax Code of 1997, as amended. They will be treated as resident citizens for income tax purposes. As such, their compensation income shall be subject to creditable withholding tax under Section 2.78.1 of RR 2-98, as amended. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Regulations governing the taxation of non-resident citizens.