ITAD BIR Ruling No. 162-11

May 27, 2011 ITAD BIR RULING NO. 162-11 Article 20 (Teachers and Researchers), Philippines-Germany tax treaty; BIR Ruling No. ITAD 085-05; BIR Ruling No. DA ITAD 114-06 European International School, Inc. 75 Swaziland Street, Better Living Subdivision Paraaque City 1711 Attention: Ms. Anna Elisabeth Kurz German School Gentlemen : This refers to your letter dated October 29, 2009 requesting for exemption from income tax for a period of two years of renumeration n paid by the European International School, Inc. ("European School") to Ms. Anna Elisabeth Kurz 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 Income and Capital ("Philippines-Germany tax treaty") . It is represented that Ms. Anna Elisabeth Kurz is a resident of Germany before coming to the Philippines, based on the Special Power of Attorney she executed on December 9, 2009, and on her Passport issued by the Government of Germany; that Ms. Kurz entered into a Contract of Local Employment with the European School where she was engaged to teach at the Deutsche Schule Manila of the European School for school year 2009-2011, from September 1, 2009 to August 31, 2011; that Ms. Kurz's employment ends on August 31, 2011, without the need of a written termination of the Contract or resignation; that the Contract may be renewed based on the agreement between Mr. Kurz and the European School; that in consideration, Ms. Kurz will receive a monthly salary of PhP31,250.00 including school breaks and a 13th month pay in December; that for July and August, Ms. Kurz will only be renumerated * for these months if she works at the European School in the beginning, during and at the end of the particular school year; that Ms. Kurz is a resident of Annex 41, Joseph Street, Better Living Subdivision, Paraaque City, Philippines; and that the European School is situated at 75 Swaziland Street, Better Living Subdivision, Paraaque City, Philippines. In reply, please be informed that under Section 25 (A) (1), in relation to Section 24 (A) (1), of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, renumeration n paid to Ms. Kurz, a nonresident alien engaged in trade or business in the Philippines, is subject to income tax as follows: "SEC. 25. Tax on Nonresident Alien individual. (A) Nonresident Alien Engaged in Trade or Business Within the Philippines. DHSCTI (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, under Section 32 (B) (5) of the Code, such remuneration may be exempt or subject to a reduced rate of income tax to the extent required by any treaty obligation on the Philippines, thus: "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: "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." (emphasis supplied) Based on the aforequoted provision, remuneration which a professor or teacher, who is or was a resident of Germany immediately before visiting the Philippines to carry out advanced study or research or to teach at a university, college, school or other educational institution in the Philippines, shall be exempt from income tax for a period not exceeding two years. Such being the case, this Office is of the opinion and so holds that salaries and other remuneration paid by the European School to Ms. Kurz for a period not exceeding two years, from September 1, 2009 to August 31, 2011, shall not be subject to Philippine income tax pursuant to Article 20 of the Philippines-Germany tax treaty. ( BIR Ruling No. ITAD 085-05 dated August 23, 2005 and BIR Ruling No. DA ITAD 114-06 dated September 27, 2006). This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed or discovered that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. AcCTaD Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue n Note from the Publisher: Copied verbatim from the official copy. The term "renumeration" should read as "remuneration".