FOREIGN governments, embassies, diplomatic
missions and international organizations located in the Philippines are
granted immunity from taxes on their employees’ salaries, regardless of
the workers’ nationality. In other words, such organizations are not
treated as withholding agents of the Philippine government.
Such immunity is based on international
comity as embodied in several international agreements to which the
Philippines is a signatory, such as the Convention on the Privileges and
Immunities of the United Nations and the Convention on the Privileges
and Immunities of Specialized Agencies ( "SA Convention"), among others.
In recognition of this immunity, Section 2.78.1(B)(5) of Revenue
Regulations (RR) No. 2-98 provides exemption from the withholding tax
system of the remunerations paid by foreign governments and
international organizations to their employees who are residents or
nationals of the Philippines.
In the past, there has been a misconception that this exemption from
withholding tax under RR 2-98 equates to the exemption from paying the
tax on such income. Thus, the Bureau of Internal Revenue (BIR) issued
Revenue Memorandum Circular (RMC) No. 31-2013 providing guidelines on
the taxation of individuals employed by foreign governments and
international organizations situated in the Philippines.
RMC 31-2013 clarified that the immunity from withholding taxes on
employee compensation pertains only to the duty to collect tax and
therefore does not carry with it the exemption from paying the income
tax itself.
In recognition that most international agreements also grant exemption
to officials and employees from paying income tax on their salaries and
emoluments, the RMC emphasized that such exemption applies only to those
officials and employees who are expressly and unequivocally identified
in international agreements and laws, and does not cover those that are
not specifically mentioned as tax exempt.
Accordingly, those not specifically granted income tax exemption under
the international agreements or laws are subject to the general tax
rules on their compensation income.
Recently, the BIR issued RMC 73-2013, which amended certain provisions
of RMC 31-2013. It provided the following additional guidelines on the
taxation of compensation income of individuals employed by international
organizations, specifically the United Nations (UN), its specialized
agencies and the International Committee of the Red Cross (ICRC):
(1) Compensation income of officials of the UN and its specialized
agencies, regardless of their nationality or place of residence, shall
be exempt from Philippine income tax, provided their names have been
communicated to the Philippine government (through the Department of
Foreign Affairs).
For the tax exemption under the SA Convention to apply, the Philippine
government should have acceded to the terms of the SA Convention and
indicated the names of the specialized agencies in the instrument of
accession.
The specialized agencies are covered by proper instruments of accession
include the International Labour Organization (ILO); Food and
Agriculture Organization (FAO); UN Educational, Scientific and Cultural
Organization (UNESCO); International Civil Aviation Organization (ICAO);
International Monetary Fund (IMF); International Bank for
Reconstruction and Development (IBRD); World Health Organization (WHO);
Universal Postal Union (UPU); International Telecommunication Union
(ITU) and International Finance Corp. (IFC).
Specialized agencies not included in the instrument of accession may be
covered by the SA Convention upon submission of subsequent written
notification by the Philippine government to the Secretary General of
the UN. Tax exemption of officials of specialized agencies not covered
by proper instrument of accession or written notification will be
evaluated based on the terms of their respective constitutional
instruments.
(2) Compensation income of ICRC Swiss delegates and alien employees,
including their spouses and dependent members of their families, shall
be exempt from Philippine income tax.
The new RMC also provides guidelines on the tax filing obligations of
individuals employed by foreign governments and international
organizations. Philippine nationals and alien individuals who qualify
for tax exemption or immunities are enjoined to file their annual income
tax returns using BIR Form 1700 or BIR Form 1701, as may be applicable,
on or before the 15th day of April of each year.
As an alternative form of systematic filing, they have the option to
submit their annual income tax returns through the duly authorized or
designated personnel of the foreign governments or international
organizations which employ them. Under this option, the International
Tax Affairs Division (ITAD), in coordination with the Department of
Foreign Affairs, must inform the concerned BIR Revenue District Office
(RDO) of the willingness of the foreign/international organization to
file its employees’ income tax returns.
Similarly, individuals who are not covered by tax exemptions under duly
recognized international agreements or laws are required to file their
annual income tax returns on or before April 15 each year.
However, foreign governments or international organizations, in their
capacity as employers, may opt to act as withholding agents for the
Philippine government and file the income tax returns of their
non-exempt employees through substituted filing. Under this filing mode,
the foreign governments or international organizations shall register
with the RDO having jurisdiction over their principal office and shall
follow the prevailing procedures and requirements on withholding of
taxes and substituted filing of income tax returns.
Foreign governments and international organizations situated in the
Philippines and/or their respective employees not covered by RMC Nos.
31-2013 and 73-2013, but who wish to avail of tax immunities under
international agreements or laws, are required to file an application
for confirmation of tax exemption with the ITAD of the BIR.
With the issuance of these RMCs, the confusion on the tax treatment of
salaries and emoluments of individuals employed by foreign governments
and international organizations should have been clarified.
The author is an assistant manager at the tax services department of
Isla Lipana & Co., the Philippine member firm of the PwC network.
Readers may call (02) 845-2728 or e-mail the author at laverne.a.bacaser@ph.pwc.com
for questions or feedback. The views or opinions presented in this
article are solely those of the author and do not necessarily represent
those of Isla Lipana & Co. The firm will not accept any liability
arising from the article.
source: Businessworld
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