March 24, 2008

BIR RULING [DA-192-08]

23 (D); 24 (A); 42(A); ITAD Ruling No. 153-06
Sycip Gorres Velayo & Co.
6760 Ayala Avenue, Makati
Metro Manila
Attention: Atty. R. C. Vinzon
Partner, Tax Services
Gentlemen :

This refers to your letter dated February 18, 2008, requesting on behalf of your client, MD Tech Phils., Incorporated
(MDTP), for confirmation of your opinion on the correct tax treatment of the income earned out of employment in the Philippines
by MDTP's expatriate employees but paid in Japan.

It is represented that MDTP is a corporation duly organized and existing under the laws of the Philippines with office
address at Main Avenue cor. 3rd Street, Cavite Economic Zone, Rosario, Cavite; that MDTP is a Philippine Economic Zone Authority
(PEZA)-registered Ecozone Export Enterprise with Registration Certificate No. 04-77 dated November 24, 2004; that MDTP is
engaged in the business of manufacturing chips on flexible printed circuit (COF) for liquid crystal display (LCD) and organic
electronic luminescence display (OELD) of communication products and other related devices; that MTDP employs expatriate
employees who by virtue of their positions reside in the Philippines; that as expatriate employees, they have no definite intention
of returning to their home countries; that their salaries are being paid under a split-pay arrangement, that is, a portion of their
salaries are being paid in Japan and the remaining portion paid in the Philippines; and that the portions of their salaries paid in
Japan were never recorded in the books of MDTP and were not included in the computation of the withholding tax on compensation
in the Philippines since MDTP had no control over their payment.

In this regard, you are requesting confirmation of your opinion that the portions of the respective income of the expatriate
employees should be included in their income subject to Philippine income tax; that however since your client has no control over
the portion paid in Japan, your client cannot be constituted as the withholding agent for the portion of the compensation paid in
Japan; and that therefore the expatriate employees have to file their respective income tax returns at the end of the taxable year
and include therein the portion paid in Japan and pay the income tax due thereon.

In reply, please be informed that under Section 22 (F) of the Tax Code of 1997, as amended, the term "resident alien" means an
individual whose residence is within the Philippines and who is not a citizen thereof.

In relation thereto, Section 4 of Revenue Regulations No. 2 (Income Tax Regulations) provides as follows,

“An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for
purposes of the income tax. Whether he is a transient or not is determined by his intentions with regard to the length and nature of
his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him a transient. If
he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who comes to the Philippines for a
definite purpose which in its nature may be promptly accomplished is a transient. But if his purpose is of such a nature that an
extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the Philippines,
he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he
came has been consummated or abandoned."
Based on the foregoing, it can be deduced that an alien (or one who is not a citizen of the Philippines) may be considered
a resident of the Philippines for income tax purposes if: (1) he or she is not a mere transient or sojourner, (2) he or she has no
definite intention as to his stay, or (3) his or her purpose is of such a nature that an extended stay may be necessary for its
accomplishment, and to that end the alien makes his or her home temporarily in the Philippines.

Thus, the MDTP's expatriate employees are considered residents of the Philippines for purposes of our income tax laws.
 Section 23 (D) of the Tax Code provides that, "(a)n alien individual, whether a resident or not of the Philippines, is taxable
only on income derived from sources within the Philippines".

Furthermore, Section 24 (A) (1) (c) of the same Code provides that "(a)n income tax is hereby imposed: . . . (o)n the
taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this
Section, derived for each taxable year from all sources within the Philippines by an individual alien who is a resident of the
Philippines".

Accordingly, the compensations received by MDTP's expatriate employees for labor or personal services performed in
the Philippines are treated as their gross income from sources within the Philippines under Section 42 (A) of the Tax Code which
provides that:

"SEC. 42. Income from Sources Within the Philippines. —

(A) Gross Income from Sources Within the Philippines. — The following items of gross income shall be treated as gross
income from sources within the Philippines:

xxx xxx xxx

(3) Services. — Compensation for labor or personal services performed in the Philippines;

xxx xxx xxx"

Based on the foregoing, the expatriate employees should include their wages or salaries directly paid in Japan (under
the split-pay arrangement) in computing their individual income tax liabilities in the Philippines. In earning such wages or salaries,
the said individuals render personal services in the Philippines as expatriate employees and thus, payment received in
consideration thereof is gross income from sources within the Philippines. The expatriate employees shall remit additional income
tax upon filing of their respective Philippine annual income tax returns because the offshore portions thereof (being paid in Japan)
were not subjected to withholding taxes since MDTP has no control over its payments.

Accordingly, the portions of the expatriates' salaries paid in Japan are subject to Philippine income tax. However, since
MDTP is not the withholding agent for the portions of the salaries of the expatriates paid in Japan, the expatriate employees,
therefore, will have to file individual income tax return at the end of the year to include the portion of their salaries paid in Japan as
subject to Philippine income tax and pay the taxes due upon filing of said returns. (BIR DA ITAD Ruling No. 153-06 dated December
12, 2006)

This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be
disclosed that the facts are different, then this ruling shall be considered as null and void.

Very truly yours,

Commissioner of Internal Revenue

By:

(SGD.) JAMES H. ROLDAN

Assistant Commissioner

Legal Service