ITAD BIR Ruling No. 018-14

February 19, 2014 ITAD BIR RULING NO. 018-14 Sections 24 and 51, NIRC of 1997, as amended; ADB Headquarters Agreement Chato & Vinzons-Chato Law Offices 8th Floor, Strata 2000 F. Ortigas Jr. Road, Ortigas Center Pasig City 1605 Attention: Wilfredo M. Chato Esther R. Ibaez Gentlemen : This refers to your 19 December 2013 letter on behalf of your clients, the Filipino employees of the Asian Development Bank (ADB), requesting confirmation of tax exemption of the Filipino employees of ADB as a requirement under Revenue Memorandum Circular No. (RMC) 31-2013, as amended by RMC 73-2013. DTcACa Citing the "Agreement between the Government of the Republic of the Philippines and The Asian Development Bank Regarding the Headquarters of the Asian Development Bank" (ADB Headquarters Agreement) as legal basis, it is represented that employees of the ADB are not subject to tax on their salaries and emoluments/income tax, except where a member deposits with its instrument of ratification or acceptance a declaration that such member retains for itself and its political subdivision the right to tax salaries and emoluments paid by ADB to citizens or nationals of such member; that through Senate Resolution No. 6 dated 16 March 1966 , the Senate concurred in ratifying the ADB Headquarters Agreement but subject to the reservation of the Philippine's right to tax the salaries and emoluments of its nationals; that in the resolution, the word "reservation" was used not as a categorical declaration that it retains the right to tax salaries and emoluments paid by ADB to its employees who are Philippine nationals/citizens but used only in its ordinary meaning such that it may or may not be exercised; that there must be an operative act, apart from the reservation itself, for the purported modification to be realized. It is also represented that for almost Fifty (50) years, ADB employees have never been subjected by the taxing authority to income tax; that the BIR, through then Regional Director Antonio Ortega confirmed that salaries and emoluments of ADB officers and staff are exempt from taxation under Article 56 of the Agreement Establishing the Asian Development Bank (ADB Charter) ; that, in practice, the Philippine government strictly observes the ADB Charter's original terms and conditions specifically on the privileges enjoyed; that the ADB privileges were enhanced through Executive Order No. 161 dated 21 April 1987 issued by then President Corazon Aquino; and that Memorandum Circular No. 94, S. 1994 issued by the succeeding President Fidel V. Ramos enjoined all government agencies to recognize and respect the privileges and immunities of the ADB and its staff. It is further represented that Article XII of the ADB Headquarters Agreement cannot be the basis to tax the Filipino employees of ADB as there is nothing therein that precludes the tax exemption of Filipino employees; that Section 45 (b) of Article XII is not a grant of authority to tax Filipino employees of the ADB, and the phrase "subject to the power of the Government to tax its nationals" is a reiteration of the reservation of tax made by the Philippine government in the ratification of the ADB Charter, and that before the power to tax is exercised, the necessary legislation or regulation must first be enacted; and that the ADB Charter is a special law that cannot be deemed modified by a later general law. Finally, it is represented that the fact that ADB Filipino employees are not covered by the Philippine labor laws, the Social Security System, Pag-IBIG and other mandatory benefits accorded Filipino employees only means that since they are treated by our labor laws differently, they are also to be treated differently in so far as our tax laws are concerned. In reply, please be informed as follows: The "Reservation" made by the Philippines regarding its right to tax its citizens who earn income as employees of ADB is not a mere reservation but an affirmation of the inherent power of the State to tax its own citizens. 1. When the ADB Charter was created in 1965, it was expressly stated in Article 56 on Exemption from Taxation that: aCSHDI "No tax shall be levied on or in respect of salaries and emoluments paid by the Bank to Directors, alternates, officers or employees of the Bank, including experts performing missions for the Bank, except where a member deposits with its instrument of ratification or acceptance a declaration that such member retains for itself and its political subdivisions the right to tax salaries and emoluments paid by the Bank to citizens or nationals of such member ." (Underscoring supplied) 2. In signing the ADB Headquarters Agreement in 1966, the Philippine government accorded tax exemption privileges to the ADB and its staff, but held on to the State's inherent power to tax, and thus made a clear limitation in so far as its right to tax its nationals. Hence, Section 45 (b), Article XII of the ADB Headquarters Agreement provides that: "Article XII PRIVILEGES AND IMMUNITIES OF GOVERNORS AND OTHER REPRESENTATIVES OF MEMBERS, DIRECTORS, PRESIDENT, VICE-PRESIDENT AND OTHERS xxx xxx xxx Section 45 Officers and staff of the Bank, including for the purposes of this Article experts and consultants performing missions for the Bank, shall enjoy the following privileges and immunities: xxx xxx xxx (b) Exemption from taxation on or in respect of the salaries and emoluments paid by the Bank subject to the power of the Government to tax its nationals ; xxx xxx xxx (Underscoring supplied)" 3. In the same year, the Philippine Congress issued Resolution No. 06 to the effect that "the Senate of the Philippines concurs, as it hereby concurs, in the ratification by the President of the Philippines of the aforesaid Agreement Establishing the Asian Development Bank, subject to the reservation that the Philippines declares that it 'retains for itself and its political subdivisions the right to tax salaries and emoluments paid by the Bank to its citizens or nationals of the Philippines' pursuant to Article 56, paragraph 2, of the Agreement." (Underscoring supplied) 4. Explicit from the foregoing is that the Philippines, by making a "reservation", simply intimated that entering upon an Agreement with ADB provides the effect that ADB income is exempt from tax by virtue of the Agreement but not the income derived by the Filipinos from ADB which is still taxable income. There is no need for an executing law to implement the "Reservation" because Philippine tax law already provides that Filipinos are liable for tax from income derived from within and without the Philippines. 5. The construction of the word "Reservation" can only be accorded its plain meaning if, before the Philippines entered into the Agreement with ADB, Filipinos earning income from without the Philippines have no obligation to pay taxes in the Philippines. Since 1939, Filipinos earning income derived from outside the Philippines are liable for tax from such income. This is true when one considers reading Section 37 in relation to Section 45 of the Internal Revenue Code of 1939, Section 21 in relation to Section 27 of the National Internal Revenue Code of 1977, and Section 24 in relation to Section 51 of the National Internal Revenue Code of 1997: CIcEHS Internal Revenue National Internal National Internal Code of 1939 Revenue Code of Revenue Code of 1977 1997 SECTION 37 . Income from Sources SECTION 21 . Tax on citizens or SECTION 24 . Income Tax Rates. Within the Philippines. (a) Gross residents. (a) Taxable "(A) Rates of Income Tax on income from sources within the compensation income. A tax is Individual Citizen and Individual Philippines. The following items hereby imposed upon the taxable Resident Alien of the Philippines. of gross income shall be treated as compensation income as defined in gross income from sources within Section 27, other than the incomes "(1) An income tax is hereby the Philippines: . . . subject to tax under paragraphs imposed: (b), (c), (d), (e) and (f) of this '"(a) On the taxable income defined (3) Services. Compensation for section, received during each in Section 31 of this Code, other labor or personal services taxable year from all sources than income subject to tax under performed in the Philippines: . . . determined in accordance with the Subsections (B), (C) and (D) of this following schedule: . . . Section, derived for each taxable (c) Gross income from sources year from all sources within and without the Philippines. The xxx xxx xxx without the Philippines by every following items of gross income individual citizen of the Philippines shall be treated as income from SECTION 27 . Taxable Income. residing therein; . . . sources without the Philippines: The term "taxable income" means . . . the pertinent items of gross xxx xxx xxx income specified in this Code less (3) Compensation for labor or the deductions, if any, authorized SECTION 51 . Individual Return. personal services performed by such type of income by this (A) Requirements. without the Philippines; . . . Code or other special laws: (1) Except as provided in paragraph xxx xxx xxx Provided, That for purposes of (2) of this Subsection, the following SECTION 45 . Individual Returns. Section 21 (b) "taxable income" individuals are required to file an (a) Requirement. (1) Every means gross income from all income tax return: citizen of the Philippines of lawful sources without the Philippines less (a) Every Filipino citizen residing in age, whether residing at home or the deductions allowed in Section the Philippines; . . . abroad and, (2) every person 29 (m). (As amended by E.O. No. residing in the Philippines, though 37) . . . not a citizen thereof, having a gross income of one thousand pesos or over, including dividends, for the taxable year, and (3) every non- resident, alien deriving income from sources within the Philippines regardless of amount, shall file an income tax return, in duplicate, setting forth specifically the gross amount of income from all sources and deducting from the total thereof the aggregate items of allowances authorized under this Title, in such form and manner as the Collector of Internal Revenue, with the approval of the Secretary of Finance, may prescribe. To accord the word "reservation" with an ordinary meaning will undermine the force of existing tax laws. Thus, a contrary interpretation would mean subverting Philippine sovereignty by virtue of a mere Agreement just for the purpose of exempting some Filipinos from income tax. While international comity is laudable and a Constitutional requirement, the power to tax is an inherent power of the State that cannot be bargained away so easily. The ADB Charter is not a law, but an agreement among Contracting States. That being the case, it is a derogatory interpretation that exemption from tax includes exemption from tax of Filipino citizens without express mention of Filipino exemption. 6. Pacta sunt servanda and international comity dictates that the Philippines should honor its international agreements in good faith. The Philippines has unarguably complied with these principles of international law by according the proper concessions and tax breaks to ADB activities. This duty ends where the concern is a domestic matter involving the taxability of the income of its citizens. The ADB Charter was never amended by subsequent Philippine tax laws, because Philippine tax laws before and after the creation of ADB imposed taxes on income of Filipinos from within and without the Philippines. 7. Thus, Revenue Memorandum Circular Nos. 31-2013 and 73-2013 are only clarifications of existing policies etched in Philippine law. 8. Finally, the ADB Filipino employees are not "not covered" by the mandatory benefits accorded to Filipino employees by government-controlled insurance/pension companies like the SSS, GSIS, Pag-IBIG, PhilHealth, etc.. The exemption as tax withholding agent of their employer, the ADB, is the only reason the ADB Filipino employees are not covered/members of the government-controlled insurance/pension companies. However, their situation do not preclude them from being beneficiaries/members of the said companies as they may opt to register and voluntary pay contributions to the said government-controlled insurance/pension companies. DHSEcI In view of the foregoing, this Office hereby reiterates its opinion that pursuant to the amended 1997 National Internal Revenue Code and the ADB Headquarters Agreement, as clarified by RMC Nos. 31-2013 and 73-2013, Filipinos who are employees of the ADB are taxable on their income derived from sources within (including their salaries and emoluments) and without the Philippines. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue