ITAD BIR Ruling No. 107-12

February 24, 2012 ITAD BIR RULING NO. 107-12 Articles 4 (Source of Income), 16 (Dependent Personal Services) and 23 (Relief from Double Taxation) Philippines-United States of America tax treaty Bayer Philippines, Inc. Bayer House Canlubang Industrial Estate Calamba, Laguna Attention: Mr. Vincenzo Langella Managing Director Ms. Maria Asuncion PM. Amistoso Director, Human Resources Gentlemen : This refers to your application for tax treaty relief dated December 8, 2009 involving the taxation of salaries paid by Bayer Philippines, Inc. ("Bayer Philippines") to Mr. Andrew Paul Mantek ("Mr. Mantek"). Basic Facts It is represented that Mr. Mantek is a citizen of the United States and has a United States passport (Passport No. 028461855) valid on April 26, 2005, to April 25, 2015; that Mr. Mantek is a resident of 115 Molave Street, Ayala Alabang Village, Muntinlupa City, Philippines, and that he has an Alien Employment Permit; and that, on the other hand, Bayer Philippines is situated at Bayer House, Canlubang Industrial Estate, Calamba City, Laguna, Philippines. It is further represented that on May 12, 2009, Mr. Mantek entered into an Employment Contract with Bayer Philippines to be the General Manager of the Healthcare-Animal Health Subgroup of Bayer Philippines where he is entitled to receive an annual net salary of PHP6,469,813.33; that the Contract is valid for three years; that one part of his salary (and his income tax due thereon in the Philippines) will be paid by Bayer Philippines while the other part (and his income tax due thereon in the United States) will be paid by Bayer U.S.; and that for the gross amount (net salary plus income tax), Bayer U.S. sends debit notes to Bayer Philippines every month for the expense booking of the total amount in the Philippines. SHECcT Relative thereto, you raised the following questions on the taxation of Mr. Mantek' s salary: 1. On whether Bayer Philippines is required to pay the income tax of the other part of Mr. Mantek' s salary which will be paid by Bayer U.S. ? 2. On whether this constitutes double taxation? 3. If Bayer Philippines is not required to pay the income tax on the other part of Mr. Mantek' s salary, what are the required documents for this purpose and whether the invoice from Bayer U.S. can be deducted in full against the gross income of Bayer Philippines ? Ruling In reply, please be informed as follows. With respect to your first question, an alien individual like Mr. Mantek, whether a resident of the Philippines or not, is subject to income tax in the Philippines but only with respect to income derived from sources in the Philippines. Section 23 (D) of the National Internal Revenue Code of 1997 ("Tax Code of 1997"), as amended, provides: "SEC. 23. General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: xxx xxx xxx (F) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines." With respect to his salary, this is considered derived from sources in the Philippines since the services that give rise to the salary will be performed by Mr. Mantek in the Philippines. Section 42 (A) (3) of the Tax Code of 1997, as amended, provides: "SEC. 42. Income from Sources Within the Philippines. (A) Gross Income from Sources Within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: DACcIH xxx xxx xxx (3) Services. Compensation for labor or personal services performed in the Philippines;" This being the case, Mr. Mantek' s salary, regardless of the person and the place it is paid or remitted (whether in the Philippines for the one part and in the United States for the other part) is subject to income tax in the Philippines. Particularly, Mr. Mantek' s net taxable salary [basic salary less personal exemption of PHP50,000.00 and additional exemption of PHP25,000.00, if any, for each dependent not to exceed four (4) and not more than twenty-one (21) years old, Section 35 (A) and (B), Tax Code of 1997, as amended] is taxable as follows: "SEC. 24. Income Tax Rates. (A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: (1) An income tax is hereby imposed: xxx xxx xxx (c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual alien who is a resident of the Philippines. The tax shall be computed in accordance with and at the rates established in the following schedule: xxx xxx xxx Over P500,000 P125,000+32% of the excess over P500,000" With respect to your second question, necessarily there is international double taxation as both jurisdictions can exercise their taxing rights over the same income. In this connection, since there is a Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income ("Philippines-United States tax treaty"), which seeks to eliminate or mitigate the effects of double taxation of income derived by a resident of a Contracting State in the other Contracting State, the relevant articles of the tax treaty provide the basis to determine whether such salary shall be exempt in the Philippines. IHCSET First, paragraph 5, Article 4 of the Philippines-United States tax treaty below, consistent with Section 42 (A) (3) of the Tax Code of 1997, as amended, treats the Philippines as the source of income of Mr. Mantek' s given that the services or employment that gives rise to such salary will be exercised in the Philippines, thus: "Article 4 SOURCE OF INCOME For purposes of this Convention: xxx xxx xxx 5. Income received by an individual for his performance of labor or personal services, whether as an employee or in an independent capacity, shall be treated as income from sources within a Contracting State only to the extent that such services are performed in that Contracting State. However, income from personal services performed aboard ships or aircraft operated by a resident of one of the Contracting States in international traffic shall be treated as income from sources within that Contracting State if rendered by a member of the regular complement of the ship or aircraft. Notwithstanding the preceding provisions of this paragraph, remuneration described in Article 20 (Governmental Functions) and payments described in Article 19 (Social Security Payments) paid from the public funds of a Contracting State or a political subdivision or local authority thereof shall be treated as income from sources within that Contracting State only." (emphasis ours) Second, while Mr. Mantek may be a resident of the United States, it is, however, not possible for him to fulfill all the conditions laid down in paragraph 2, Article 16 of the Philippines-United States tax treaty below in order for his salary to be exempt, to wit: "Article 16 DEPENDENT PERSONAL SERVICES 1. Except as provided in Article 20 (Governmental Functions), wages, salaries, and similar remuneration derived by an individual who is a resident of one of the Contracting States from labor or personal services performed as an employee, including income from services performed by an officer of a corporation, may be taxed by that Contracting State. Except as provided by paragraphs 2 and 3 and in Articles 20 (Governmental Functions), 21 (Teachers), and 22 (Students and Trainees), such remuneration derived from sources within the other Contracting State may also be taxed by that other Contracting State. 2. Remuneration described in paragraph 1 derived by an individual who is a resident of one of the Contracting States shall be exempt from tax by the other Contracting State if AHCaED a) He is present in that other Contracting State for a period or periods aggregating less than 90 days in the taxable year; b) He is an employee of a resident of, or of a permanent establishment maintained in the first-mentioned Contracting State; and c) The remuneration is not borne as such by a permanent establishment which the employer has in that other Contracting State." On the first condition alone (subparagraph (a)), the fact that Mr. Mantek' s Employment Contract with Bayer Philippines is for three years is sufficient to say that his length of stay in the Philippines will exceed 90 days in each taxable year concerned. On the second condition (subparagraph (b)), the fact that the Employment Contract is entered into with Bayer Philippines (which appears to be a domestic corporation based on its address) is sufficient to say also that Mr. Mantek is not an employee of a United States corporation or a permanent establishment of that corporation in the Philippines. On the third condition (subparagraph (c)), this condition is no longer necessary since it is established that Mr. Mantek is not an employee of a United States corporation or a permanent establishment of that corporation in the Philippines. Third, since Mr. Mantek' s salary is subject to income tax in the Philippines for the part which will be paid by Bayer Philippines and for the other part which will be paid by Bayer U.S., any income tax paid by Mr. Mantek in the Philippines with respect to his salary may be allowed as a credit against his income tax due in the United States subject to certain limitations. Paragraph 1, Article 23 of the tax treaty provides: "Article 23 RELIEF FROM DOUBLE TAXATION Double taxation of income shall be avoided in the following manner: 1. In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a citizen or resident of the United States as a credit against the United States tax the appropriate amount of taxes paid or accrued to the Philippines and, in the case of a United States corporation owning at least 10 percent of the voting stock of a Philippine corporation from which it receives dividends in any taxable year, shall allow credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine corporation paying such dividends with respect to the profits out of which such dividends are paid. Such appropriate amount shall be based upon the amount of tax paid or accrued to the Philippines, but the credit shall not exceed the limitations (for the purpose of limiting the credit to the United States tax on income from sources within the Philippines or on income from sources outside the United States) provided by United States law for the taxable year. For the purpose of applying the United States credit in relation to taxes paid or accrued to the Philippines, the rules set forth in Article 4 (Source of Income) shall be applied to determine the source of income. For purposes of applying the United States credit in relation to taxes paid or accrued to the Philippines, the taxes referred to in paragraphs 1 (b) and 2 of Article 1 (Taxes Covered) shall be considered to be income taxes." (emphasis ours) ATSIED For administrative purposes, since only that part of Mr. Mantek' s salary which will be paid by Bayer Philippines will be reflected in his BIR Form No. 2316 (Certificate of Compensation Payment/Tax Withheld) for each taxable year concerned, Mr. Mantek is required to file a separate BIR Form No. 1700 (Annual Income Tax Return) for each taxable year concerned. On the Gross Taxable Compensation Income portion of this Form, Mr. Mantek must declare his annual salary where one part is paid by Bayer Philippines and the other part by Bayer U.S. If he received other types of income which are not subjected previously to a final withholding income tax and which are not excluded from Gross Income under Section 32 of the Tax Code of 1997, he must include this income in the Other Taxable Income portion of the Form. Together, Gross Taxable Compensation Income and Other Taxable Income constitute Mr. Mantek' s Gross Taxable Income. On the Tax Due portion of Form No. 1700, Mr. Mantek may deduct the amount of tax paid or collected by Bayer Philippines as reflected in BIR Form No. 2316. Finally, there is no need to answer your third question since we have ruled already that the other part of Mr. Mantek' s salary, although paid or remitted by Bayer U.S. in the United States, is subject to income tax in the Philippines. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue