ITAD Ruling No. 042-04

May 3, 2004 ITAD RULING NO. 042-04 NIRC - Sec 78 (A) (4) as implemented by Revenue Regulations No. 2-98 - Sec. 2.78 [Sec. 2.78.1B] BIR Ruling No. DA-ITAD-16-03 Foster Parents Plan, Inc. 2nd Floor CJV Building 108 Aguirre St., Legaspi Village Makati City, Philippines Attention: Ms. Jiji S. Bugna Operations Support Manager and Acting Country Director Gentlemen : This refers to your letter dated January 15, 2004, indorsed to this Office by the Department of Finance (DOF), applying for exemption from withholding tax obligations on compensation, pursuant to Section 2-78(B) of Revenue Regulations No. 2-98. It is represented that Foster Parents Plan, Inc. (FPPI) is a non-profit, non-denominational child welfare agency organized under the laws of the State of New York, USA; that FPPI is registered with the Advisory Committee on Voluntary Foreign Aid of the International Cooperative Administration, a voluntary relief agency qualified to participate in the relief program in the Philippines under the terms and conditions embodied in the US Embassy's Diplomatic Notes Nos. 1071 and 3001; that it is an international organization as indicated in the Department of Foreign Affairs Office of Protocol's internal notice dated July 1994; that it was granted license to operate in the Philippines by the Department of Commerce and Industry under Securities and Exchange Commission (SEC) Registration No. 358 on June 22, 1961; that FPPI, purely humanitarian in character, conducts program in over 40 countries, including the Philippines, for the care, maintenance, education, training and well-being of children orphaned and distressed or otherwise made destitute; that the sources of its funds are monthly cash grants from foster parents and donations from various international agencies or corporations; and, that all expenses are defrayed only in support of FPPI's approved programs and projects for children and their families and communities and the development and maintenance of its day-to-day operation; that under Republic Act (RA) No. 4169 which took effect on August 8, 1964, FPPI is exempt from the payment of internal revenue taxes. Based on the above representations, you now request for a ruling to the effect that FPPI, being an international organization with tax-exemption privileges, be exempt from the obligation to withhold tax on compensation. 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 Relative thereto, 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 a 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) Based on the above-quoted provisions, 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 the requirement of withholding tax on compensation. In view thereof, this Office is of the opinion and so holds that FPPI, being an international organization, is exempt from the obligation to withhold income tax on its compensation payments to its employees who are residents or citizens of the Philippines. AaDSTH However, FPPI's exemption does not cover 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 tax on the corresponding taxes, creditable or final of all its income payments subject thereto, pursuant to Section 57(A) of the NIRC and Section 2.57.3 of RR No. 2-98. ( BIR Ruling No. DA-ITAD-16-03 dated January 24, 2003 ) This ruling is issued on the basis of the facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service