Tax Imposed on the Entire Consultancy Fee

July 6, 1988 BIR RULING NO. 296-88 50-b 75-84 296-88 Gentlemen : This refers to your letter dated April 27, 1988 a ruling as to whether the entire consultancy fee consisting of salary and other allowances to be paid by you to Dr. Benito F. Legarda, Jr. is subject to income tax. It is represented that Dr. Benito F. Legarda, Jr. is presently Finance Attache (Economic) at the Philippine Embassy, in Washington, D.C., U.S.A.; that on December 12, 1986, a Contract of Services was executed by and between you and Dr. Benito F. Legarda, Jr. whereby the latter will render consultancy services in your favor consisting of the following: cdtech a. To maintain appropriate and continuing contract with the various financial institutions with which the Philippines does business, including but not limited to the following: Export Import Bank of the United States Commodity Credit Corporation United States Agency for International Development International Monetary Fund World Bank International Finance Corporation United States Department of Treasury Federal Reserve Bank of New York b. To prepare a systematic historical record of all negotiations entered into by and between Philippine government agencies, particularly the Ministry of Finance and the Central Bank of the Philippines, with all the above institutions; c. To keep abreast of the status of other countries' negotiations with these institutions; and d. To maintain continuing contact with Philippine government representatives in each of these institutions. that for in consideration of the aforesaid services, you shall pay Dr. Benito F. Legarda, Jr. the following: a. Regular compensation at every end of the month equivalent to that of a Philippine foreign service officer with the rank of Counsellor: Salary P71,364/annum or P5,947/mo. to be remitted in US$ at current exchange rates Overseas Allowance $2,500/month Living Quarters Allowance $ 980/month Representation Allowance $ 200/month Family Allowance for dependent spouse $40/month for each dependent child $30/month PLUS: Clothing Allowance $ 500/annum Reimbursement up to 75% of the annual cost or medical insurance premiums for the CONSULTANT, his spouse and minor children b. Reimbursement of actual, necessary and reasonable office expenses of the Consultant in the course of performing his functions; c. Reimbursement of actual, necessary and reasonable expenses including Business or Executive Class plane/train fare and hotel accommodation of the Consultant on official travel outside of Washington, D.C. but within the United States of America; d. Allowances for official travel of the Consultant outside of the United States of America in the following amounts: Per Diem $80/day Transportation Allowance $30/day Service Fee $12/day Room Rental 50% of hotel room rate Business or Executive Class plane/train fare Representation Allowance not exceeding $1,600 in any given month where the travel is for more than 7 days. that the contract shall be effected for a period of one (1) year commencing on October 1, 1986; that the said contract was extended for two (2) years commencing October 1, 1987 and expiring on September 30, 1989; and that although Dr. Legarda, is serving as Finance Attache to Washington D.C., he is not receiving his salary and/or allowances from the Department of Foreign Affairs but from the Central Bank on account of the foregoing contract of service. In reply thereto, I have the honor to inform you that since Dr. Legarda has an approved appointment as Finance Attache in the Philippine Embassy in Washington, D.C., U.S.A., his status, for income tax purposes, is that of a resident citizen; hence, subject to Philippine income tax imposed under Section 21(a) of the Tax Code. Accordingly, and inasmuch as there is no employer-employee relationship between you and Dr. Legarda, his compensation as your consultant stationed abroad is subject to the 10% expanded withholding tax under Section 1(a)(6) of Revenue Regulations No. 6-85 implementing Section 10(b) of the Tax Code. The tax withheld is allowable as tax credit against the income tax liability of Dr. Legarda in the taxable year in which income was earned or received. However, while Section 1 of Revenue Regulations No. 6-85 provides that the amounts subject to withholding tax shall include not only fees, but also per diems, allowances and other form of income payments nevertheless the aforementioned allowances of Dr. Legarda, are not subject to income tax or the creditable expanded withholding tax because overseas allowances paid to and received by Finance Attaches stationed abroad are considered given in furtherance of the interests of the Republic of the Philippines. (Sec. 3(b), P.D. No. 1285; BIR Ruling No. 075-84) In other words, only the so-called salary of Dr. Legarda is subject to income tax. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner