ITAD BIR Ruling No. 160-11

May 23, 2011 ITAD BIR RULING NO. 160-11 Article 20, Philippines-Germany tax treaty; BIR Ruling No. ITAD 85-05 European International School, Inc. 75 Swaziland Street Better Living Subdivision 1711 Paraaque City Attention: Frank Arnold Gentlemen : This refers to your letter dated June 17, 2009 requesting confirmation that remuneration paid by European International School, Inc. ("European School") to Mr. Frank Arnold ("Mr. Arnold") is exempt from income tax for a period of two years pursuant to Article 20 of the Agreement Between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation with respect to Taxes on the Income and Capital ("Philippines-Germany tax treaty") . It is represented that Mr. Arnold was a resident of Germany based on the Certificate issued by the Central Office for Tax Matters of Germany on January 9, 2008; that Mr. Arnold was resident of Beim Alten Gaswerk 2e, 22761 Hamburg, Germany; that Mr. Arnold is currently residing at 256 New Orleans Street, Better Living Subdivision, Paraaque City, Philippines; that Mr. Arnold entered into a Contract of Employment with the European School where Mr. Arnold was engaged to teach in Deutsche Schule Manila (German School Manila) of the European School starting May 1, 2009 to April 30, 2011, without requiring a written termination of contract or resignation; that European School is situated at 75 Swaziland Street, Better Living Subdivision, Paraaque City, Philippines; and that in consideration, Mr. Arnold will receive remuneration every month including school breaks and a 13th month pay in December; that for the months of July and August, Mr. Arnold will only be remunerated for these months if he worked with the European School from the beginning, during and until the end of the school year. It is finally represented that the remuneration subject to this ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Certification issued by the Board Treasurer of the European School on June 19, 2009. In reply, please be informed that as a general rule, remuneration paid to Mr. Arnold, a nonresident alien engaged in trade or business in the Philippines, is subject to income tax at the rate of 5 to 32 percent depending on the amount of his total taxable income in the taxable year concerned. Section 25 (A) (1), in relation to Section 24 (A) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides: "SEC. 25. Tax on Nonresident Alien individual. (A) Nonresident Alien Engaged in Trade or Business Within the Philippines. aDHCcE (1) In General A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a 'nonresident alien doing business in the Philippines', Section 22(G) of this Code notwithstanding." "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: Not over P10,000 5% Over P10,000 but not over P30,000 P500 + 10% of the excess over P10,000 Over P30,000 but not over P70,000 P2,500 + 15% of the excess over P30,000 Over P70,000 but not over P140,000 P8,500 + 20% of the excess over P70,000 Over P140,000 but not over P250,000 P22,500 + 25% of the excess over P140,000 Over P250,000 but not over P500,000 P50,000 + 30% of the excess over P250,000 Over P500,000 P125,000 + 32% of the excess over P500,000 xxx xxx xxx" However, such remuneration may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines. Section 32 (B) (5) of the Code provides: "SEC. 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." With respect to a treaty, you invoke the Philippines-Germany tax treaty. Article 20 thereof provides: AHCaES "Article 20 TEACHERS AND RESEARCHERS 1. Remuneration which a professor or teacher, who is or immediately before was a resident of a Contracting State and who visits the other Contracting State for a period not exceeding two years for the purpose of carrying out advanced study or research or for teaching at a university, college, school or other educational institution, receives for such work shall not be taxed in that Contracting State. 2. This Article shall not apply to income from research if such research is undertaken not in the general interest but primarily for the private benefit of a specific person or persons." Based on the aforequoted article, remuneration paid to a professor or teacher who was a resident of Germany before coming to the Philippines for the purpose of teaching at a university, college, school or other educational institution in the Philippines shall be exempt from income tax for a period of two years. Such being the case, this Office is of the opinion and so holds that remuneration paid by the European School to Mr. Arnold as a teacher at the Deutsche Schule Manila (German School Manila) of the European School shall be exempt from income tax for a period not exceeding two years, from May 1, 2009 to April 30, 2011. (BIR Ruling No. ITAD 85-05 dated August 23, 2005). This ruling is issued based on the facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue