Rental, Interest, Income Earned by Non-Resident Alien Not Engaged in Business Subj. to 30% Final Income Tax

October 20, 1993 BIR RULING NO. 417-93 RENTAL, INTEREST, INCOME EARNED BY NON-RESIDENT ALIEN NOT ENGAGED IN BUSINESS SUBJ. TO 30% FINAL INCOME TAX 22 (b) 000-00 417-93 Mr. Ishwar Jethral Ramnani c/o Messrs. Redentor G. Guyala Cirilo Doronilla 6/F Don Pablo Building 114 Amorsolo Street Makati, Metro Manila This refers to your letter dated September 16, 1993 requesting reconsideration of our letter reply dated August 6, 1993 and specifically questioning two (2) allegedly incorrect assumptions or misrepresentation of facts stated therein, namely: 1. that the winning party plaintiffs (i.e., you and your spouse Sonya) are non-resident Americans (or non-resident aliens); and 2. that the money judgment rendered in your favor is in the nature of "rents, casual gains, profits and income" as are taxable year Section 22(b), in relation to Sections 50(a) and 51(a) of the Tax Code, as amended; hence, it is your opinion that the aforesaid money judgment is not subject to income tax and consequently to final withholding tax of 30%. The legal issue subject of this controversy all stemmed out from the decision of the Supreme Court in Choithram Jethmal Ramnani, et al. vs. CA, et al ., G.R. No. 85494, and Spouses Ishwar and Sonya Jethmal Ramnani vs. CA, et al ., G.R. No. 85496, promulgated on May 7, 1991, the undisputed factual findings of which as affirmed by the Court of Appeals and the Supreme Court are as follows: "Sometime in 1965, Spouses Ishwar and Sonya Ramnani, both American citizens remitted a sum of $150,000.00 (which Ishwar borrowed from his wealthy father-in-law in Switzerland) to Choithram to be used in their real estate business in the Philippines. With their main business based in New York, Ishwar and Sonya found it difficult to manage their investments in the Philippines, hence they executed a general power of attorney on January 24, 1966 appointing Choithram and Navalri (also a brother of Ishwar) as attorneys-in-fact empowering them to manage and conduct their business concern in the Philippines. Shortly after the execution of the general power of attorney, on February 1, 1966 and May 6, 1966, Choithram, in his capacity as attorney-in-fact, entered into two (2) agreements with Ortigas & Co., Ltd. (ORTIGAS) for the purchase of two (2) parcels of land in Ugong, Pasig, Metro Manila paying the down payment and installments thereof with his personal checks. Four buildings were erected on the said lots in 1966 which were leased out. Two of the four buildings erected thereon were later burned. Sometimes in 1970, Ishwar requested Choithram to account for the income and expenses relative to the said properties during the period 1967 1970 but the latter failed and refused to do so. As a consequence, Ishwar revoked the general power of attorney on February 4, 1971; Choithram and ORTIGAS were duly informed of the said revocation on April 1, 1971 and May 24, 1971, respectively. Nevertheless, on February 19, 1973, Choithram transferred all rights and interests of Ishwar and Sonya in favor of Nirmla Ramnani, wife of Moti, son of Choithram. Upon complete payment of the lots, ORTIGAS executed the corresponding deeds of sale in favor of Nirmla. TCT Nos. 403150 and 403152 were issued in her favor." The case had been the subject of a long court battle until the same reached the Supreme Court. In its decision dated May 7, 1991, as modified by its resolution dated February 26, 1992, March 18, 1992 and May 25, 1992, the Supreme Court declared Spouses Ishwar and Sonya as the sole owner of the disputed properties, but only to emphasize that attorney-in-fact Choithram had no factual and legal reasons to claim ownership of the properties handled by him in trust for the owners. That is why the Highest Court emphasized that there is nothing in its decision nor in its subsequent resolutions which orders reconveyance of the real estate to Ishwar Ramnani but instead ordered Choithram and ORTIGAS to pay said spouses cash corresponding to the fair market value of the subject land and improvements at the time of the satisfaction of the judgment. In addition, Choithram and ORTIGAS were ordered to pay said spouses the following: 1. the rental income of said properties from 1967 up to the time of the satisfaction of the judgment; 2. exemplary and moral damages amounting to P500,000.00 and P200,000.00, respectively; and 3. 10% attorney's fees based on total award. These awards shall be subject to 6% interest per annum from the time judgment becomes final until they are fully paid by petitioner. The Regional Trial Court of Pasay City has been directed to determine the fair market value of the subject properties and the rental income thereof. It appears, however, that based on an untitled document dated July 18, 1993, you and your wife who arrived in the Philippines on September 10, 1993 are set to leave the country very soon, hence, you and the other parties concerned, in an effort to expedite matters, compromised the settlement of the monetary entitlements awarded by the Court to you by setting the money value of the said judgment provisionally at P65,000,000.00 under the following terms: a. P40,000,000.00 at the time of the signing of the agreement; b. P10,000,000.00 on or before August 4, 1993, and c. P15,000,000.00 on or before September 3, 1993. On August 3, 1993, Atty. Mario G. Ongkiko requested this Office for a ruling as to whether or not his clients Messrs. Harish Ramnani and ORTIGAS, as payors of the P65,000,000.00, are to be constituted as the withholding agents of the government of the 30% final income tax provided for in Section 22(b), in relation to Section 50(a) and 51(a) of the Tax Code. This Office confirmed the opinion of Atty. Mario E. Ongkiko as per our ruling dated August 6, 1993 constituting Messrs. Harish Ramnani and Ortigas as the withholding agents of the 30% final income tax or a total amount of P20,150,000 broken down as follows: 30% final income tax on P65 MILLION P19,500,000.00 1% documentary stamp tax on P65 MILLION 650,000.00 P20,150,000.00 =========== The aforesaid opinion is now the basis of your request for reconsideration holding that you are RESIDENT ALIEN and that the money judgment in your favor in the said decision is in the form of DAMAGES and therefore not subject to income tax and consequently to the final withholding tax of 30%. Based on all the foregoing facts and circumstances, we disagree with your opinion that you are a resident alien for purposes of income taxation. We are rather reiterating our opinion that you are a non-resident alien not engaged in trade or business within the Philippines. R.A. No. 4324 introduced an amendment to Section 22(a) of the Tax Code to the effect that for purposes of Income Tax Law, a non-resident alien who shall come to the Philippines and stay therein for an aggregate period of 180 days shall be deemed a non-resident alien doing business in the Philippines. The words "shall be deemed" indicate that it is immaterial whether or not such alien who has stayed in the Philippines for more than 180 days is really or actually engaged in trade or business in the Philippines. Since you just came to the Philippines last September 10, 1993 and you are set to leave the country very soon, it is very clear that you are a non-resident alien not engaged in trade or business in the Philippines. On the other hand, although it is evident that the Supreme Court awarded damages to you and not real estate, it nonetheless declared that you are the sole owner of the disputed properties, hence, Choithram and Ortigas were ordered to pay you the following: 1. the rental income of said properties from 1967 up to the time of the satisfaction of the judgment; 2. exemplary and moral damages amounting to P500,000.00 and P200,000.00 respectively; 3. 10% attorney's fees based on the total award; and 4. 6% interest per annum on the total sum of the award from the time judgment becomes final until they are fully paid by the payors. On that basis therefore, please be informed that the above stated rental income from the subject properties from the year 1967 up to the time of the satisfaction of the judgment falls within the purview of the phrase "rents, casual gains, profits and income" in Section 22(b) of the Tax Code, as amended, in relation to Sections 50(a) and 51(a) of the same Code. The same holds true in the case of the 6% interest per annum on the total sum of the awards from the time judgment becomes final until they are fully paid by the payors. Both are income which are subject to the 30% final income tax provided for in Section 22(b), in relation to Sections 50(a) and 51(a) of the Tax Code, as amended. Henceforth, Messrs. Harish Ramnani and ORTIGAS, as the payors of the P65 MILLION, are constituted as the withholding agents of the Government insofar as the aforesaid rental income and interest income are concerned. But this is not so in the case of the exemplary and moral damages amounting to P500,000.00 and P200,000.00, respectively, awarded to you because these are not considered taxable income. It has been previously held in so many cases that legal expenses incurred in Court proceedings where the taxpayer was awarded damages are not deductible from gross income under Section 29(a) of the Tax Code. Likewise, the attorney's fees awarded to you is not also subject to income tax, the same being merely a reimbursement of your expenses/advances in the course of the hearing of this case. In view thereof, this Office is of the opinion, as it hereby holds that you are a non-resident alien not engaged in trade or business in the Philippines; hence, the rental income and interest income awarded to you by the Court are both subject to the 30% final income tax provided for under Section 22(b) of the Tax Code, as amended, in relation to Sections 50(a) and 51(a) of the same Code. We would like to reiterate our opinion that Section 22(b) of the Tax Code is the applicable provision of taxing the receipt of income by a non-resident alien, such as rents, casual gains, profits, and income. Inasmuch as the compromise settlement arose from a money judgment involving ownership over real property, the income is taxable in the Philippines notwithstanding the fact that the recipients thereof are American citizens, as provided in Article 7(1) of the RP-US Tax Treaty where the location of the real property is the situs of income taxation. However, the award of damages such as moral, exemplary and attorney's fees are not subject to income tax and consequently to the withholding tax, the same being merely a reimbursement of your expenses/advances in the course of the hearing of your case. Consequently, Messrs. Harish Ramnani and ORTIGAS, as payors of the P65,000,000.00 money judgment, are constituted as the withholding agents of the 30% final income tax due from you, insofar as the taxable income portion of the aforesaid award is concerned pursuant to Section 22(b), in relation to Sections 50(a) and 51(a) of the Tax Code, as amended. Therefore, the amount to be withheld from the aforesaid taxable income portion of the money judgment is P17,340,000.00 broken down as follows: Total money judgment P65,000,000.00 Less: Exemplary damages P500,000.00 Moral damages 200,000.00 Attorney's fees 6,500,000.00 7,200,000.00 P57,800,000.00 x .30 FINAL INCOME TAX P17,340,000.00 =========== This letter modifies our opinion in our letter-reply to Atty. Mario Ongkiko, on the same subject matter, dated August 6, 1993. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue