Audit of Income Tax Returns of Non-resident Citizens

September 12, 1991 REVENUE AUDIT MEMORANDUM ORDER NO. 4-91 SUBJECT : Audit of Income Tax Returns of Non-resident Citizens The following guidelines shall govern the audit of income tax returns of non-resident citizens. The International Tax Affairs Division and all Assessment Branches in the regional offices, in line with the delegation of the audit of these returns pursuant to RMO No. 10-91, will adopt these procedures and forms in the discharge of the audit function. I. INITIAL VERIFICATION 1. Perform an initial analysis of the Income Tax Returns (BIR Form No. 1701C) selected for audit pursuant to the selective audit procedures prescribed in RMO No. 36-90. Verify completeness of information in the return and of required supporting documents and check mathematical accuracy. 2. Send communication to the taxpayer regarding information requirements. (Refer to Annex A and B for sample communication forms on taxable and refundable cases, respectively.) 3. Arrange a meeting with the taxpayer to facilitate completion of the case. (Scheduled meetings must be strictly monitored to impress upon the taxpayer the importance of the case at hand.) II. AUDIT OF INCOME 1. Examine pertinent compensation agreement such as contract of employment or crewing agreement to verify if there are special privileges (paid vacation, use of company car, housing, bonus allowances, etc.) and other forms of income received by the taxpayer which are taxable and have not been reported. Note: Gross income of a non-resident citizen outside the Philippines includes all income enumerated under Section 28 (a) of the NIRC, whether or not such income is exempted from income tax in the foreign country it was derived. However, regarding special privileges granted to non-resident citizens on their gross compensation income apply the convenience rule per Revenue Regulations Nos. 12-86 and 6-82 as follows: "If, however, living quarters or meals are furnished to an employee for the convenience of the employer, the value thereof need not be included as compensation subject to withholding." 2. Examine the income reported in the foreign income tax return and/or withholding tax statement attached to the foreign return, if any, and reconcile amount indicated therein with the amount of income declared in BIR Form No. 1701C. 3. Consider reasonableness of the taxpayer as indicated in the personal exemption section of the tax return and, when in doubt, require presentation of legal papers. IV. n AUDIT OF OTHER ITEMS IN THE RETURN 1. Determine propriety of taxpayer's classification as a Non-Resident Citizen under Section 21(b) of the NIRC by examining passports, copies of employer's certification showing inclusive dates of service or stay abroad and/or seamen's book, whichever is applicable. Notes: Make reference to various BIR Rulings and Issuances concerning the status and residence of non-resident citizens, some of which are summarized below: No. 060-83:Filipino citizens employed by the International Cotton Advisory Committee, a public International Organization entitled to enjoy the privileges exemptions and immunities conferred by the International Organization Immunities Act are non-resident citizens subject to Philippine income tax. No. 061-83: A Filipino permanent resident of the United Kingdom, by virtue of his physical presence abroad with definite intention to reside therein is considered a non-resident citizen. No. 130-84: An employee of the International Food Policy Research Institute (IFPRI) and holder of a G-4 Visa is a non-resident citizen. No. 026-86: A Filipino citizen who works in Hongkong from Monday to Friday and spends his weekends and a 6-week vacation leave in the Philippines is considered as a non-resident citizen. No. 150-86: A Filipina wife of a US citizen, living on the income from husband's investments (in countries other than the U.S. and R.P.), who spends life travelling around the world (on tourist visas) with husband when not in the countries of their respective citizenships and who doesn't have any permanent residence anywhere is not a non-resident citizen within the contemplation of the Tax Code . No. 283-86: The Filipino crewmen of international vessels of wholly-owned subsidiaries of the Philippine National Oil Company are considered contract workers, hence, non-resident citizens. No. 307-88: Ministers of Iglesia ni Kristo (INK) assigned in Hawaii are considered non-resident citizens. No. 169-90: Officials of the United Nations (U.N.) including its specialized agencies (pursuant to the Convention on Privileges and Immunities of the Specialized Agencies of the U.N. adopted by the General Assembly on November 21, 1947) who are certified as such by the U.N., United Nations Industrial Development Organization and International Atomic Energy Agency shall be exempt from income tax. For contract workers, apply the test as the required length of stay abroad of not less than 183 days. Refer to Memorandum dated June 9, 1981 issue by then Acting Commissioner of Internal Revenue to The Chief of the International Operations Division for the guidelines to be observed, as follows: "For example, an individual was employed on board an international carrier from March 29, 1980. Although his presence abroad was less than 183 days in 1980, for purposes of characterizing him as non-resident citizen with respect to his compensation income from without the Philippines, he should be considered as having been physically present abroad for not less than 183 days by taking into account also the number of days of his physical presence abroad during the year immediately preceding the current taxable year under consideration. If, during the taxable year, the contract of employment is terminated and within the same taxable year his contract of employment was renewed or he was re-employed and, pursuant to such renewed contract of employment or re-employment, he is required to perform the service outside the Philippines for a period extending beyond the taxable year, he should likewise be considered as physically present abroad most of the time during the taxable year and therefore qualifies as non-resident Filipino citizen with respect to his compensation income from sources outside the Philippines." 2. Ask taxpayer as to whether his/her spouse worked abroad during the taxable year and consolidate any of such income in the return if said spouse is a Filipino. If income has been derived locally by the spouse, require filing of separate return using BIR Form No. 1701A or 1701. 3. Conversion of the tax due to be paid in Philippine peso or other foreign currencies to U.S. dollar must be made in accordance with the rules prescribed under Revenue Memorandum Circular No. 76-91. The following examples shall govern the computations: A) Erroneous conversion from foreign currency other than U.S. dollar to U.S. dollar. Ms. I. Hamilton, a Filipino, legally separated, immigrant to Australia. In 1990, she derived income from the following employees in Australia: Norton Pty Ltd. A $3,264.68 Lyndon Mercantile 600.00 A $3,864.68 The applicable conversion rates are given: Conversion rate of Australian dollar to U.S. dollar used by the taxpayer in paying her tax liability .750 Average interbank reference rate of Australian dollar to U.S. dollar during the taxable year 1990 per CBP reference rates .7816 Prevailing interbank reference rate of U.S. dollar to Philippine peso on June 28, 1991 27.6231 Computations made per return by Ms. Hamilton: Gross income A.$ 3,264.68 Multiply by rate adopted by taxpayer .75 Converted gross income U.S. $ 2,448.51 Less: personal exemption 2,000.00 foreign national income tax (A $ 268.78 x .75) 201.55 2,201.55 Adjusted gross income U.S. $ 246.96 Tax due and paid thereon: U.S. $ 246.96 x 1% U.S. $ 2.47 ======== An audit of the income tax return filed by Ms. I. Hamilton was made by the BIR and the assessment was prepared on June 28, 1991: Computations made per audit: Gross income A $ 3,864.68 Multiply by average rate, 1990 .7816 Converted gross income U.S. $ 3,029.63 Less: personal exemption 2,000.00 foreign national income tax (A $ 268.73 x 7816 210.04 2,210.04 Adjusted gross income U.S. $ 810.59 Tax due thereon: U.S. $ 810.59 x 1% U.S. $ 8.10 Less: tax due and paid per return 2.47 Deficiency tax due in U.S. dollar U.S. $ 5.63 Multiply by exchange rate on June 28, 1991 155.52 Deficiency tax due in pesos, excluding increments P155.52 ====== B) Erroneous U.S. dollar/Philippine peso rate used upon filing and payment of income tax: N.A. Villas, Filipino, head of the family, is a contract worker in Dhahran, Saudi Arabia. For the taxable year 1989, he earned a basic salary of U.S. $ 7,350.00. Mr. Villas filed his income tax return on March 26, 1990. The following applicable rates are given: casia Prevailing interbank reference rate of U.S. dollar to Philippine peso on March 26, 1990 23.5999 Prevailing interbank reference rate of U.S. dollar to Philippine peso on June 28, 1991 22.78 Computations made per centum by Mr. Villas: Gross income U.S. $ 7,350.00 Less: personal exemption 4,000.00 Adjusted gross income U.S. $ 3,350.00 ======= 4) In addition to the rules prescribed in RMC No. 76-91, the following procedures will have to be followed to govern the conversion of currencies in situations wherein there are withholding of taxes made by the local recruitment agency as evidenced by the W-2: a. Use the conversion rate adopted in the withholding tax statement (W-2). b. If the withholding tax statement is stated only in Philippine peso, convert to U.S. dollar using the average Peso/dollar exchange rate during the taxable year. c. If the withholding tax statement is stated only in foreign currency other than U.S. dollar, convert to U.S. dollar using the average foreign currency/U.S. dollar conversion rate during the taxable year. d. If there are differences in the conversion rates as prescribed above, use the conversion rate which will result in the higher gross income and/or tax liability. 5. Based on audit findings above, recompute the correct amount of tax refundable/collectible and accomplish BIR Form No. 1749-A entitled "Audit Sheet for Individual Non-Resident Citizen" (Refer to Annex C.) 6. Notify taxpayer of the corresponding proposed assessment by sending the Preliminary Assessment Notice. 7. If a refund for overpayment or double payment is found in order, accomplish also the "Audit Sheet for Individual Non-Resident Citizen" and process pursuant to the provisions of RMO 28-89. V. OTHER REQUIREMENTS Verify the completeness of the attachment of the following basic documents: A) If the income of the non-resident citizen consists of income from business, a signed statement showing the amount of gross receipt, cost of sales and gross income. If from compensation, statement of earnings or certificate from employer. B) Copy of the income tax return filed with the government of the foreign country where income is earned and proof of payment of foreign taxes paid. C) Proof of intention to reside permanently abroad or to return and reside permanently in the Philippines which may be any of the following: 1) If immigrant, photocopy of foreign visa. 2) If permanent employee assigned abroad, a certification from his employer showing the nature, duration of his contract and/or period covered by services rendered abroad; 3) If contract worker, (a) photocopy of Seaman's Certificate or (b) contract of employment, (c) certification from the employer showing the nature, duration of his contract and/or period covered by his services rendered abroad. 4) If returning resident, photocopy of passport showing the stamp of the Philippine Commission on Immigration and Deportation to the effect that said non-resident intends to reside permanently in the Philippines. Tax due thereon: U.S. $ 3,350.00 x 1% U.S. $ 33.50 Multiply by rate adopted by taxpayer 22.78 Tax due and paid, 03/26/90 P763.13 ======== An audit of the income tax return filed by Mr. Villas was made and assessment prepared on June 28, 1991: Computation made per audit: Gross income U.S. $ 7,350.00 Less: personal exemption 4,000.00 Adjusted gross income U.S. $ 3,350.00 Tax due thereon: U.S. $ 3,350.00 x 1% U.S. $ 33.50 Less: tax paid per return using correct exchange rate at time of payment on March 26, 1990 (P763.13/23.5999) 32.34 Deficiency tax due in U.S. dollar U.S. $ 1.16 Multiply by the exchange rate as of 06/28/91 (time of audit) 27.6231 Deficiency tax due in pesos, excluding increments P32.04 ======== C) Failure to qualify as non-resident citizen. A.M. Verague, Filipino, married to F.P. Verague, a seaman employed by Eastgate (International) Maritime Agencies, Inc. from July 3, 1990 to November 30, 1990. In 1990, he earned a basic salary of 9,600 Saudi Riyal inclusive of the amount of tax withheld from such income by the local recruitment agency totalling to U.S. $ 10.55 or the equivalent of P226.04. cdt Mr. Verague filed his income tax return on April 2, 1991. The following conversion rates are given: Average interbank reference rate of Saudi Riyal to U.S. dollar during the taxable year 1990 per CBP reference rate .26717 Average interbank reference rate of U.S. dollar to Philippine peso during the taxable year 1990 24.3105 Conversion rate used by the taxpayer in determining his tax liability .26057 Computations made per return by Mr. Verague: Gross income S.R. 9,600.00 Multiply by rate adopted by taxpayer .26057 Converted gross income U.S. $ 2,501.47 Less: personal exemption 4,000.00 Adjusted gross income U.S. $ (1,498.53) Tax due thereon: NIL ======== An audit of the income tax return filed by Mr. Verague was made on June 28, 1991 and it was found out that he did not qualify as a non-resident citizen for the taxable year 1990 because has actual stay abroad was less than 183 days. Computations made per audit: Gross income S.R. 9,600.00 Multiply by average rate, 1990 .26717 Converted gross income U.S. $ 2,564.83 Multiply by average rate, 1990 24.3105 Gross income P62,352.30 Less: personal exemptions 12,000.00 Amount subject to tax P50,352.30 ======= Tax due thereon: Tax on P40,000 P3,075.00 Tax on P10,352.30 x 15% 1,552.84 Total P4,627.84 Less: withholding tax remitted to the BIR 226.04 Deficiency tax due, excluding increments P4,401.80 ======= D) BIR Form W-2 (Certificate of Tax Withheld on Compensation), if applicable. cd i VI. COMPROMISE PENALTIES Compromise penalties accruing to the taxpayer for internal revenue violations must be collected according to the "Revised Schedule of Compromise Penalties" as embodied in Revenue Memorandum Order No. 1-90. This order takes effect immediately. (SGD.) JOSE U. ONG Commissioner of Internal Revenue n Note from the Publisher: Copied verbatim from the official document.