ITAD Ruling No. 016-03

January 24, 2003 ITAD RULING NO. 016-03 NIRC Sec. 78 (A) (4) as implemented by Revenue Regulations No. 2-98 Sec. 2.57 (Sec. 2.57.3), (Sec. 2.57.5); Sec. 2.78 (Sec. 2.78-1) (B) (5) BIR Ruling No. 228-92 Follosco Morallos & Herce Suite 1506, 15th floor 88 Corporate Center 141 Valero Street corner Sedeo Street Salcedo Village, Makati City 1229 Attention: Atty. Rachel P. Follosco Gentlemen : This refers to your letter dated May 14, 2002, requesting confirmation that your client, Japan External Trade Organization, Manila Office (JETRO Manila) is exempt from withholding tax obligations, pursuant to the National Internal Revenue Code of 1997 (NIRC) and its implementing regulations. It is represented that JETRO Manila is the Philippine office of Japan External Trade Organization (JETRO), a Japanese governmental organization with head office at 2-5, Toranomon 2-Chome, Minato-ku, Tokyo, Japan; that JETRO was created under Law No. 95 (The Law Concerning Japan External Trade Organization) dated April 26, 1958 as amended (JETRO Charter), to carry out comprehensively and effectively the activities concerning the promotion of Japan's international trade and to conduct basic and comprehensive research on the economy and related circumstances of the Asian region, among others, disseminate the results of such research, and thereby contribute to the expansion of international trade and promotion of economic cooperation with such regions; that under its charter, JETRO is fully capitalized by funds appropriated for the purpose by the Japanese Government; that JETRO is under the control, supervision, and direction of the Ministry of Economic, Trade and Industry (METI, formerly Ministry of International Trade and Industry or MITI), an agency under the executive branch of the Japanese Government, accordingly, its finance and accounting are subject to pertinent ordinances/orders of the METI, and, the appointment of its key officers is made by or subject to the approval of the METI; that in recognition of the governmental status of JETRO, the Japanese officers of JETRO Manila have been issued by the Department of Foreign Affairs of the Philippines a Non-Immigrant Diplomatic Visa pursuant to the Philippine Immigration Act, Section 9(e-2); that the Department of Trade and Industry of the Philippines (DTI) supports the activities of JETRO Manila in promoting closer trade relations between the Philippines and Japan per certification dated May 10, 1977 issued by the DTI. Based on the above representations, it is your opinion that JETRO Manila, being an instrumentality of the Government of Japan, is not to be designated as a withholding agent of the Bureau of Internal Revenue, for tax purposes. In support thereto, you cite as legal basis international comity as a limitation of taxation and section 78(A)(4) of the National Internal Revenue Code of 1997 (NIRC). In reply, please be informed that Section 78(A)(4) of the NIRC provides, viz : "SEC. 78. Definitions . . . . "(A) Wages . The term 'wages' means all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash, except that such term shall not include remuneration paid : xxx xxx xxx "(4) For services by a citizen or resident of the Philippines for a foreign government or an international organization . (Emphasis supplied) xxx xxx xxx Furthermore, Revenue Regulations No. 2-98, in implementing the above-quoted provision, provides, viz : Sec. 2.78. WITHHOLDING TAX ON COMPENSATION . . . . Sec. 2.78.1. Withholding of Income Tax on Compensation Income . xxx xxx xxx (B) Exemptions from withholding tax on compensation . The following income payments are exempted from the requirement of withholding tax on compensation: xxx xxx xxx (5) Compensation for services by a citizen or resident of the Philippines for a foreign government or an international organization . Remuneration paid for services performed as an employee of a foreign government or an international organization is exempted . The exemption includes not only remuneration paid for services performed by ambassadors, ministers and other diplomatic officers and employees but also remuneration paid for services performed as consular or other officer or employee of a foreign government or as a non-diplomatic representative of such government. (Emphasis supplied) aAHDIc Based on the above, the remuneration paid by a foreign government or an international organization to its employees who are residents or citizens of the Philippines is exempt from withholding tax. Hence, being an instrumentality of the government of Japan, JETRO Manila is exempt from the obligation to withhold income tax on its compensation payments to its employees who are residents or citizens of the Philippines. However, Section 57(A) of the NIRC provides, viz : "Sec 57. Withholding of Tax at Source . "(A) Withholding of Final Tax on Certain Incomes . Subject to rules and regulations the Secretary of Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by Sections . . . of this Code on specified items of income shall be withheld by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 58 of this Code. (Emphasis supplied) Relative thereto, Sec. 2.57.3 of Revenue Regulations (RR) No. 2-98 dated April 17, 1998, provides, viz : "Sec. 2.57.3. Persons required to deduct and withhold . The following persons are hereby constituted as withholding agents for purposes of the creditable tax required to be withheld on income payments enumerated in Section 2.57.2: "(A) In general, any juridical person, whether or not engaged in trade or business; "(B) An individual, with respect to payments made in connection with his trade or business. However, insofar as taxable sale, exchange or transfer of real property is concerned, individual buyers who are not engaged in trade or business are also constituted as withholding agents; "(C) All government offices including governments-owned or controlled corporation, as well as provincial, city and municipal governments. As explicitly stated in the above provisions, the duty to withhold the final tax on certain incomes subject to withholding tax lies with the payor corporation of person. For purposes of the creditable tax, the corporation or person constituted as withholding agent is required to withhold the said tax on its income payments. Worthy to note is the case of CIR vs. CA , 1 where the Supreme Court held that " codal provisions on withholding tax are mandatory and must be complied with by the withholding agent ." Hence, unless there is a law or agreement duly entered into which specifically provides that an entity is exempt from withholding tax obligation, such entity has a legal duty to make the necessary deductions on its income payments subject to withholding tax. In the instant case, there is no special law or bilateral agreement duly entered into by and between the Philippines and Japan which exempts JETRO Manila from the obligation to withhold tax on its income payments. The absence of any law or bilateral agreement to that effect negates the application of international comity as legal basis for the exemption being claimed. In the book of Jovito R. Salonga, "Private International Law," p. 69 citing the case of Hilton vs. Guyot , 159 U.S. 113, comity is defined as neither a matter of absolute obligation, on the one hand, nor of mere courtesy and goodwill, upon the other. It is a recognition which one nation allows within its territory, to the legislative, executive, or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens, or of other persons who are under the protection of its laws. It is that reciprocal courtesy which one member of the family of nations owes to others. It supposes friendship. It assumes the prevalence of equality and justice. 2 It is in recognition of that international duty and out of due respect and courtesy among nations that bilateral agreements or conventions are entered into between States wherein the grant of immunities and privileges such as exemptions are being embodied. In view thereof, JETRO Manila, being an instrumentality of the government of Japan, is exempt from the obligation to withhold income tax on the compensation payment to its employees who are either residents or citizens of the Philippines, pursuant to Section 78(A)(4) of the NIRC in relation to Section 2.78.1(B)(5) of RR No. 2-98 dated April 17, 1998. ( BIR Ruling No . 228-92 dated August 21, 1992 ) EScHDA However, the above pronouncements do not apply as regards the other income payments of JETRO Manila. Hence, this Office is of the opinion and so holds that, except on compensation income, JETRO Manila is not exempt from the obligation to withhold Philippine taxes on all its income payments subject to withholding tax. It is therefore constituted as withholding agent for the purpose of withholding the corresponding taxes, creditable or final, on all its income payments subject thereto, pursuant to Section 57(A) of the NIRC and Section 2.57.3 of RR No. 2-98. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service Footnotes 1. CIR vs. CA , 102 SCRA 134 (199) citing CIR vs. Malayan Insurance , 129 Phil. 165, 170 (1967). 2. Jovito R. Salonga, "Private International Law," 1998, p. 69.