ITAD Ruling No. 081-00

July 28, 2000 ITAD RULING NO. 081-00 Article 15, RP-France Tax Treaty 044-97 Article 14, RP-Italy Tax Treaty Article 61, EO 226 Section 25 (C), NIRC of 1997 Marilyn A. Cruz Legrand Phils. Inc. 2/F Zuellig Bldg. Sen. Gil J. Puyat Avenue Makati City M a d a m : This refers to your letters dated September 1 and 2, 1999 seeking advice on the applicability of the RP-France and RP-Italy Tax Treaties on your two clients namely Messrs. Jerome Marchadier and Marco Corti, and on whether Article 61 of Executive Order (EO) No. 226 (otherwise known as the Omnibus Investments Code of 1987) has been superseded by the said tax treaties. LexLib It is represented that Mr. Marchadier is a French national and is a resident of Limoges France; that he is a Resident Representative of Legrand Phils. Inc., a regional or area headquarter in the Philippines of Legrand France, as per Certificate of Registration and License No. A1997-10837 issued by the Securities and Exchange Commission dated July 28, 1997; that his remuneration or salary is being paid directly by Legrand France; and that he has no interest or investments whatsoever in any company or business in the Philippines; that Mr. Corti is an Italian national and is a resident of Como, Italy; that he is a Technical and Marketing Consultant of the said regional or area headquarter; that his remuneration or salary is being paid directly by Biticino, Spa., Italy, a subsidiary of the same regional or area headquarter; that he has no interest or investment whatsoever in any company or business in the Philippines; and that his presence in the Philippines does not in any way exceed an aggregate period of 183 days. In reply, please be informed as follows: I. For Mr . Jerome Marchadier Article 15 of the RP-France Tax Treaty provides viz : "Article 15 " DEPENDENT PERSONAL SERVICES "1. Subject to the provisions of Articles 16, 18 and 19 salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State. "2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if: a.) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned, and b.) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and c.) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State. xxx xxx xxx" Paragraph 2 lays down the conditions for a resident of France to be exempted from Philippine income tax. Applying the said provision, the remuneration received directly from France by Mr. Marchadier shall not be subject to Philippine income tax if the duration of his stay in the Philippines does not exceed an aggregate of 183 days in a year and such remuneration is not paid nor borne by Legrand Phils. As per certification issued by Mr. Francois Grappote, the Chief Executive Officer of Legrand France, Mr. Marchadier is assigned as the regional executive, and tasked to work exclusively for Legrand Phils. and that he will receive and will be paid by the said regional or area headquarter. Such being the case, Mr. Marchadier did not meet the conditions set forth in subparagraphs b and c of paragraph 2 of the said Article. Thus, he shall then be taxed at 15% based on his gross income, pursuant to the Tax Code of 1997. Furthers fringe benefits which may be received by Mr. Marchadier is subject to the Fringe Benefits Tax at 15% on its grossed-up monetary value. The said tax base shall be computed by dividing the monetary value of the fringe benefit by 85%. (Section 33 of the Tax Code of 1997 and Revenue Regulations No. 3-98) II. For Mr . Marco Corti Article 14 of the RP-Italy Tax Treaty provides viz: "Article 14 " PERSONAL SERVICES "1. Subject to the provisions of Articles 15, 17 and 18 salaries, wages and other similar remuneration or income for personal (including professional) services derived by a resident of a Contracting State, shall be taxable only in that State unless the services are performed in other Contracting State. If the services are so performed, such remuneration or income as is derived therefrom may be taxed in that other State. "2. Notwithstanding the provisions of paragraph 1, remuneration or income derived by a resident of a Contracting State in respect of personal (including professional) services performed in the other Contracting State shall be taxable only in the first-mentioned State if: a.) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the taxable year concerned, and b.) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and c.) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State. xxx xxx xxx' Paragraph 2 also lays down the conditions for a resident of Italy to be exempted from Philippine income tax. Based on your representations, Mr. Corti's presence in the Philippines does not in any way exceed an aggregate period of 183 days in a taxable year. Further his remuneration as Technical and Marketing Consultant is being paid directly by Biticino, Spa, Italy, a non-resident of the Philippines. Thus, although it may be argued that Legrand France maintained a regional or area headquarter here in the Philippines, which for purposes of the RP-Italy Tax Treaty is considered as a " permanent establishment " pursuant to Article 5 paragraph 2 of the said Tax Treaty, the said headquarter nevertheless must not pay or accrue the said remuneration in its books of accounts, hence, the aforesaid three conditions imposed under the aforequoted Article 14 paragraph 2 of the subject Tax Treaty have been sufficiently met and complied with. (BIR Ruling No. 044-97) In view thereof, the remuneration or salary received by Mr. Corti for services rendered in the Philippines, as Technical and Marketing Consultant of Legrand Phils. Inc., is not subject to Philippine income tax pursuant to Article 14 paragraphs 1 and 2 of the RP-Italy Tax Treaty. III. On whether or not the provisions of the said Tax Treaties superseded Article 61 of EO No . 226 Article 61 of EO No. 226 (as amended by Republic Act No. 8756) provides, viz: "ARTICLE 61. Withholding Tax of 15% Aliens employed by the regional or are headquarters and regional operating headquarters of multinational companies shall be subject for each taxable year upon their gross income received as salaries, wages, annuities, compensations, remuneration and emoluments to a tax equal to fifteen percentum (15%) of such gross income. The same tax treatment is applicable to Filipinos employed and occupying the same positions as those aliens employed by multinational companies: Provided, That said Filipinos shall have the option to be taxed at either 15% of gross income or at the regular tax rate on their taxable income in accordance with the National Internal Revenue Code, as amended by Republic Act No. 8424." Furthermore, Section 25(C) of the Tax Code of 1997, which practically stated the same provision as that of the said Article 61 above regarding alien individual employed by the said headquarters, provides: "SEC. 25. Tax On Nonresident Alien Individual . xxx xxx xxx" "(C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies . There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area headquarters and regional operating headquarters, a tax of fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by these multinational companies. . . ." A tax treaty is in the nature of a special law, i.e., a law which relates to particular persons or things of a class or to a particular portion or section of the State. On the other hand, the provisions of the Tax Code or other tax laws (such as the said Article 61) are in the nature of a general law or that which applies to all of the people of the State or to all of a particular class of persons in the State with equal force. LibLex It is a rule in statutory construction that a general law and a special law on the same subject should be read together and harmonized, if possible, with a view to giving effect to both. In case of conflict between the two, the special law shall prevail. The fact that one law is special and the other general, creates a presumption that the special law is to be considered as remaining an exception of the general law, one as a general law of the land and the other as the law of a particular case. Hence, the application of a tax treaty is limited only to persons or properties which are clearly covered thereby. A tax treaty therefore may not be viewed as superseding or repealing the Tax Code. Article 61 of EO No. 226, as amended, and Articles 15 and 14 of the RP-France and RP-Italy Tax Treaties, respectively, may be harmonized in such a way as to give effect to both laws. Under the said Articles 15 and 14, it is provided that a resident of France or Italy, respectively, may not be taxed if he is present in the Philippines for less than or equal to 183 days in a year and the remuneration of such resident " is paid by, or on behalf of, an employer who is not a resident of the Philippines, and is not borne by a permanent establishment or a fixed base which the employer has in the Philippines ." On the other hand, the said Article 61 contemplates that the payor of the remuneration of the alien concerned is the regional or are headquarter or the regional operating headquarter of a multinational corporation, which for purposes of the said Tax Treaties is considered as a " permanent establishment ", and thus, it is tasked to withhold from such remuneration the tax due therefrom. Thus, if all of the conditions cited under Articles 15 and 14 of the RP-France and RP-Italy Tax Treaties, respectively, are met, no Philippine income tax shall be imposed on the income of the residents of France and Italy. On the other hand, if one of the conditions is not satisfied, the residents of France and Italy shall become subject to Philippine tax imposed under Article 61 of EO No. 226, as amended, or Section 25(C) of the Tax Code of 1997. This ruling is issued based on the foregoing facts as represented. If upon investigation, it will be disclosed that the said facts are different, then this ruling shall be considered null and void. cdlex Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group