Individual Income Tax Liability of Employees of Potential Foreign Customers

November 24, 1988 BIR RULING NO. 558-88 22 (a) (1) & (b) 000-00 558-88 Gentlemen : This refers to your letter dated July 28, 1988 stating that your company is engaged in the fabrication of steel structures for both local and foreign customers; and that some of your potential foreign customers are inquiring on the individual income tax liability of their employees in the Philippines assuming their stay within the country is under the following conditions: "1. They shall enter the Philippines under Law Instruction No. 27 of the Commissioner of Immigration and Deportation. "2. They shall stay within the country for the duration of the project. They will merely act as inspectors representing their Company, which does not have regional headquarters in the Philippines. Their job is to ensure that, as contractors, they follow the target schedules for delivery and contract specifications. "3. They will not receive salaries in the Philippines. It is possible that certain sums of money may be advanced for certain living expenses during their stay here. These advances shall be billed to their Head Office at cost. Alternately, their employer may remit to them certain amounts for their living expenses." Based on the foregoing representations, you are requesting in effect a ruling on the individual income tax liability in the Philippines of the aforesaid employees of your potential customers. In reply, please be informed that the pertinent provisions of the Tax Treaty which the Philippines may have entered into with the country of which your potential foreign customer is a resident, shall govern with respect to the income tax liability of its employees staying in this country. However, in the absence of any Tax Treaty, the pertinent provisions of the National Internal Revenue Code shall govern. Under Section 22(a)(1) of the Tax Code, a non-resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year shall be deemed a non-resident alien doing business in the Philippines, Section 2C(g) of the Tax Code notwithstanding, and as such is subject to tax in the same manner as resident citizens and aliens on taxable income received from all sources within the Philippines. On the other hand, if the stay in the Philippines does not exceed 180 days during any calendar year, said employee is considered a non-resident alien not engaged in trade or business in the Philippines; hence, his entire gross income received from all sources within the Philippines is subject to income tax at the rate of 30%. [Sec. 22(b), Tax Code] Gross income from sources in the Philippines includes compensation for labor or personal services performed within the Philippines regardless of the residence of the payor, of the place in which the contract for service was made, or of the place of payment. (Sec. 155, Revenue Regulations No. 2, Sec. 36(a)(3), Tax Code) Accordingly, since the employees of your customers are performing personal services in the Philippines, their gross income consisting of salaries as well as their living expenses whether paid here or abroad constitutes Philippine source income, said employees shall be subject to Philippine income tax based on their net income or gross income depending on their length of stay in the Philippines. cdta Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner