ITAD Ruling No. 159-02

September 13, 2002 ITAD RULING NO. 159-02 RP-Germany, Article 24 RP-Germany, Protocol NIRC of 1993, Section 21 BIR Unnumbered Ruling dated May 10, 1973 Leonarda Llamido Schneider Moldau Street 1, 7U172 Neckarsulm Amorbach, Germany M a d a m : This refers to your letter dated June 8, 2001 seeking clarification as to the taxability of your income derived in Germany during taxable years 1995, 1996 and 1997 and your failure to file the necessary information return therefor. It is represented that your are married to a German national and have been residing in Germany for 10 years now; that you were issued a visa by the Government of Germany as a permanent resident; that in year 1995, you were permitted to work and had been paying income taxes in Germany; that on March 2001, when applying for the renewal of your Philippine passport in Bonn, Germany, it has come to your knowledge that you have been assessed of deficiency taxes by the Philippine Government for taxable years 1995, 1996 and 1997; and that you are also being obliged to pay the corresponding penalty for your failure to file the necessary information return. In reply, please be informed that the Protocol which forms an integral part of the Philippine-Germany tax treaty provides as follows: "PROTOCOL "xxx xxx xxx" 1. Nothing in the Agreement shall be construed as depriving the Republic of the Philippines of the right to tax its own citizens who are residents of the Federal Republic of Germany in accordance with the Laws of the Philippines but the Federal Republic of Germany shall not be bound to give credit for such tax. This paragraph shall cease to have effect with respect to taxation years beginning after the last day of the calendar year in which an Agreement concluded between the Republic of the Philippines and any third State in which the Republic of the Philippines relinquishes its right to tax its citizens resident in the State, enters into force. "xxx xxx xxx" In this connection, Section 21(b) of the National Internal Revenue Code of 1993 (NIRC of 1993) provides, viz : "(b) Foreign source gross income derived by a non-resident citizen. A tax is hereby imposed upon the taxable income derived by a non-resident citizen from all sources without the Philippines during each taxable year computed in accordance with the following schedule: If the amount subject to tax is: Not over U.S. $6,000 1% Over U.S. $6,000 but not over U.S.$20,000 US$60+2% of excess over US$6,000 Over U.S.$20,000 U.S.$340+3% of excess of over U.S.$20,000" Based on aforequoted provisions, notwithstanding the existing tax treaty between the Philippines and the Federal Republic of Germany for the avoidance of double taxation, the Philippines has reserved the right to tax its citizens residing in Germany as provided in the Protocol of the Philippine-Germany tax treaty. In this regard, the NIRC of 1993 which covers the taxable years 1995 to 1997 provides that Filipino citizens, whether residents or not, are taxed from sources within and outside the Philippines. Therefore, you are still liable for Philippine taxes with respect to your income in Germany during the taxable years 1995 to 1997. (BIR Unnumbered Ruling dated May 10, 1973) However, notwithstanding the preceding paragraph, Article 24 of the same treaty provides as follows: "Article 24 Relief From Double Taxation "xxx xxx xxx" 2. Subject to the provisions of the laws of the Republic of the Philippines relating to the allowance as a credit against Philippine tax of tax paid in a territory outside the Republic of the Philippines, German tax payable under the laws of the Federal Republic of Germany and in accordance with this Agreement whether directly or by deduction, in respect of income from sources within the Federal Republic of Germany shall be allowed, where similar tax is imposed in the Republic of the Philippines, as a credit against Philippine tax payable in respect of that income. The deduction shall not, however, exceed that part of the Philippine income tax, as computed before the deduction is given, which is appropriate to the income which may be taxed in the Federal Republic of Germany. "xxx xxx xxx" Based on the above, the German taxes paid for your income for taxable years 1995 to 1997 derived in Germany shall be allowed as tax credit against Philippine tax payable in respect of that income upon sufficient proof of payment thereof. Finally, the filing of information return was not required under the NIRC of 1993, thus, you are not required to file an information return during said taxable years. Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service