ITAD BIR Ruling No. 238-13

August 15, 2013 ITAD BIR RULING NO. 238-13 Article 21 (TEACHERS), Philippines-USA tax treaty International School of Manila University Parkway, Fort Bonifacio Taguig City Attention: Ms. Sabrina Marie Howard Gentlemen : This refers to the tax treaty relief application (TTRA) filed on November 13, 2012, requesting confirmation that salaries and other remuneration paid by the International School of Manila ("International School") to Ms. Sabrina Marie Howard are exempt from income tax pursuant to the 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-USA tax treaty") . Basic Representations It is represented that Ms. Howard is a resident of USA for the taxable year 2012 based on the Certification issued by the US tax authority on June 11, 2012; that the International School has entered into Overseas Hire Contract with Ms. Howard on July 26, 2012 for school year 2012-2013, where Ms. Howard is entitled to receive a salary in the amount of USD$18,500 from the International School; that the International School is located at University Parkway, Fort Bonifacio, Taguig City, Philippines; and that based on the Certification issued by the Director for Human Resources of the International School, Ms. Howard has been invited by and are under contract with the International School to teach thereat for a period of two years from August 2012 to June 2014. In reply, please be informed that Section 14 of Revenue Memorandum Order No. (RMO) 72-2010 1 which took effect on November 4, 2010, provides that: " SEC. 14. When and Where to File the TTRA . All tax treaty relief applications (updated BIR Forms No. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). If the forms or any necessary documents are submitted to any other BIR Office, the application shall be considered as improperly filed. ESHcTD Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event . Failure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA under this RMO ." (emphasis supplied) Relative thereto, Section 13 (4) of the same RMO defines the first taxable event for purposes of filing the TTRA, to wit: "SEC. 13. Definitions . xxx xxx xxx 4. First taxable event for purposes of filing the Tax Treaty Relief Application (TTRA), shall mean the first or the only time when the income payor is required to withhold the income tax thereon or should have withheld taxes thereon had the transaction been subjected to tax; and for 0901-C applications, before the due date of the Documentary Stamp Tax (DST) on the sale of the shares of stock." (emphasis supplied) Thus, since the subject TTRA was filed only on November 13, 2012, all salaries or remuneration paid on or before November 13, 2012, if any , to Ms. Howard shall be governed by Section 25 (A) (1), in relation to Section 24 (A) (1) (c), of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, and shall be subject to income tax as follows: "SEC. 25. Tax on Nonresident Alien Individual. (A) Nonresident Alien Engaged in Trade or Business Within the Philippines . (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." DCcTHa "SEC. 24. Income Tax Rates . (A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of 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 "For married individuals, the husband and wife, subject to the provision of Section 51(D) hereof, shall compute separately their individual income tax based on their respective total taxable income: Provided, That if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income. EaHATD Provided, That minimum wage earners as defined in Section 22(HH) of this Code shall be exempt from the payment of income tax on their taxable income. Provided, further, That the holiday pay overtime pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax." However, salaries or remuneration paid on November 14, 2012 and thereafter, or up to June 2014 which is the end of Overseas Hire Contract between the International School and Ms. Howard, shall be governed by Section 32 (B) (5) of the Tax Code, whereby such income may be exempt from income tax or subject to a reduced rate 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-USA tax treaty. Article 21 thereof provides: ICHAaT "Article 21 Teachers 1. Where a resident of one of the Contracting States is invited by the Government of the other Contracting State, a political subdivision or local authority thereof, or by a university or other recognized educational institution in that other Contracting State to come to that other Contracting State for a period not expected to exceed 2 years for the purpose of teaching or engaging in research, or both, at a university or other recognized educational institution and such resident comes to that other Contracting State primarily for such purpose, his income from personal services for teaching or research at such university or educational institution shall be exempt from tax by that other Contracting State for a period not exceeding 2 years from the date of his arrival in that other 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 provision above-quoted, income derived by a resident of US from teaching at a university or other recognized educational institution in the Philippines pursuant to an invitation of the Government of the Philippines or a political subdivision or local authority of the Philippines, or of the university or the educational institution itself, shall be exempt from income tax in the Philippines for a period of two years from the date of his first arrival in the Philippines. Accordingly, the salaries, allowances, and other monetary and non-monetary benefits paid or given by the International School to Ms. Howard received on November 14, 2012 and thereafter or up to June 2014 are exempt from income tax pursuant to Article 21 of the Philippines-USA tax treaty. 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. HDIaET Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Guidelines on the Processing Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties.