Tax Implications of the Compensation Received by the Teachers of the German School

November 6, 1997 BIR RULING NO. 116-97 21 (a) 000-00 116-97 Sycip Gorres Velayo & Company 6760 Ayala Avenue Makati City Attention: Atty . E . C . Alcantara Gentlemen : This refers to your letter dated February 14, 1997, requesting for a ruling on behalf of your client, the German School, on the tax implications of the compensation received by the teachers of the school under the following circumstances, as follows: cdpr "1. German teachers assigned to work in the German school for not exceeding two years; "2. German teachers assigned to work in the German school for more than two years; "3. German teachers initially assigned to work in the German school for two years but subsequently extended." It is represented that on September 7, 1971, the Government of the Federal Republic of Germany and the Government of the Republic of the Philippines entered into a technical cooperation agreement to promote technical and economic development of the two States; that by virtue of this agreement, the two states agreed among others to promote the establishment of training centers and model institutions by dispatching German teachers and technicians and by providing equipment and to support cooperation between the two countries in the field of education and training; that in line with this agreement, the Federal Republic of Germany established in the Philippines, the German School which uses the German-type system of education and curricula under the auspices of the German Embassy in the Philippines; and that the German School employs German teachers with varying periods of assignment. In reply, please be informed that pursuant to Article 20(1) of the RP-Germany Tax Treaty, "remuneration received by a professor or teacher who is or immediately before was a resident of Germany and who visits the Philippines for a period not exceeding two years for the purpose of carrying out advanced study or research or for teaching at a university, college, school or other educational institution shall not be taxed in the Philippines". Accordingly, compensation of German School teachers whose assignment will not exceed two years shall not be subject to tax. However, if the term of assignment of the teacher is more than two years, the tax exemption under the Treaty will not apply. Hence, income received by the alien (teacher) from all sources within the Philippines shall be subject to the rates applicable to resident citizens, provided, he qualifies as a resident alien for income tax purposes. Furthermore, income received by teachers, who initially intended to stay in the Philippines for not more than two-years but whose duration of teaching assignment has been extended beyond the two-year period for causes beyond the teachers control, shall be tax exempt for the first two-years pursuant to the Treaty; however, income received by the teachers beyond the two-year period, from all sources within the Philippines, shall be subject to the rates applicable to residents. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue