As provided in the Philippine Tax Code, a resident citizen is taxable on all income derived from sources within and without the Philippines, while a non-resident citizen is taxable only on income derived from sources within the Philippines.
Section 22 (E) of the Tax Code defines a non-resident citizen as any of the following:
(1) A Philippine citizen who establishes to the satisfaction of the Bureau of Internal Revenue (BIR) Commissioner the fact of his physical presence abroad with a definite intention to reside therein.
(2) A Philippine citizen who leaves the country during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis.
(3) A Philippine citizen who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year.
A person previously considered a non-resident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the country shall likewise be treated as a non-resident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines.
The forgoing Tax Code provision mirrors the definitions under Section 2 of Revenue Regulations (RR) No. 1-79 dated Jan. 8, 1979. Under the RR, a non-resident citizen is one who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with the definite intention to reside therein, and shall include any Filipino who leaves the country during the taxable year as an immigrant, a permanent employee abroad, or a contract worker.
The same RR also defined the term “most of the time” under Section 22(E)(3) above by establishing the 183-day physical presence rule that continues to be applied today.
However, the application of this rule is not as simple as it appears as exemplified in BIR Ruling No. 305-2016 where a government employee who was on assignment abroad for three years was held to be a resident citizen for tax purposes and as such, subject to tax on her worldwide income.
In the ruling, the critical points raised by the BIR are the temporary nature of the transfer (secondment) and the continuing employee-employer relationship with the Philippine employer.
Based on the Memorandum of Agreement between the government agency and the international organization, the individual remained an employee of the government agency during the period of secondment but was considered on leave without pay. The government agency continued to pay for the mandatory government contributions during the duration of her secondment. As such, the employee does not qualify as a non-resident citizen under Section 22(E)(3).
Further, the individual did not have any intention to reside in the foreign country either as an immigrant or on a permanent basis to make her a non-resident citizen under Section 22(E).
In 2011, the BIR issued BIR Ruling No. 517-2011 stating that employees who rendered services for more than 183 days in foreign countries were not considered non-residents on the basis that: (1) the employee-employer relationship continued to exist between the local company and employees; and (2) the salaries of the employees were paid by the local company. Section 2.78.3 of RR 2-98 states that an employee-employer relationship exists when the person for whom the services were performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished, but also as to the manner and means by which such results are accomplished.
It can be inferred from both rulings that whichever party shoulders the compensation payment and whichever party has the right to control and direct the individual do not matter. The substance of the employee arrangements with foreign companies appears inconsequential to the issue. What seems to be the determining factor is whether the individual remains employed by the local employer, regardless of where the employee gets directions or compensation.
As the year is about to end, entities that second or transfer employees abroad for more than 183 days during the taxable year may need to revisit the provisions of their employees’ contracts of employment and arrangements with foreign companies to properly assess the residency status of their employees.
Most taxpayers want to comply with tax rules and regulations. However, some of our existing ones are vague and can be interpreted differently. Hence, as part of the government tax reform plan to restructure individual tax rates, the BIR may need to revisit Section 22(E)(3), issue implementing guidelines, and provide clear-cut illustrations on when an individual qualifies as a non-resident.
The views or opinions expressed 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.
Jane R. Alcause-Fabro is a Director at the Client Accounting Services group of Isla Lipana & Co.,
(02) 845-27 28
jane.r.alcause@ph.pwc.com
Section 22 (E) of the Tax Code defines a non-resident citizen as any of the following:
(1) A Philippine citizen who establishes to the satisfaction of the Bureau of Internal Revenue (BIR) Commissioner the fact of his physical presence abroad with a definite intention to reside therein.
(2) A Philippine citizen who leaves the country during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis.
(3) A Philippine citizen who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year.
A person previously considered a non-resident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the country shall likewise be treated as a non-resident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines.
The forgoing Tax Code provision mirrors the definitions under Section 2 of Revenue Regulations (RR) No. 1-79 dated Jan. 8, 1979. Under the RR, a non-resident citizen is one who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with the definite intention to reside therein, and shall include any Filipino who leaves the country during the taxable year as an immigrant, a permanent employee abroad, or a contract worker.
The same RR also defined the term “most of the time” under Section 22(E)(3) above by establishing the 183-day physical presence rule that continues to be applied today.
However, the application of this rule is not as simple as it appears as exemplified in BIR Ruling No. 305-2016 where a government employee who was on assignment abroad for three years was held to be a resident citizen for tax purposes and as such, subject to tax on her worldwide income.
In the ruling, the critical points raised by the BIR are the temporary nature of the transfer (secondment) and the continuing employee-employer relationship with the Philippine employer.
Based on the Memorandum of Agreement between the government agency and the international organization, the individual remained an employee of the government agency during the period of secondment but was considered on leave without pay. The government agency continued to pay for the mandatory government contributions during the duration of her secondment. As such, the employee does not qualify as a non-resident citizen under Section 22(E)(3).
Further, the individual did not have any intention to reside in the foreign country either as an immigrant or on a permanent basis to make her a non-resident citizen under Section 22(E).
In 2011, the BIR issued BIR Ruling No. 517-2011 stating that employees who rendered services for more than 183 days in foreign countries were not considered non-residents on the basis that: (1) the employee-employer relationship continued to exist between the local company and employees; and (2) the salaries of the employees were paid by the local company. Section 2.78.3 of RR 2-98 states that an employee-employer relationship exists when the person for whom the services were performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished, but also as to the manner and means by which such results are accomplished.
It can be inferred from both rulings that whichever party shoulders the compensation payment and whichever party has the right to control and direct the individual do not matter. The substance of the employee arrangements with foreign companies appears inconsequential to the issue. What seems to be the determining factor is whether the individual remains employed by the local employer, regardless of where the employee gets directions or compensation.
As the year is about to end, entities that second or transfer employees abroad for more than 183 days during the taxable year may need to revisit the provisions of their employees’ contracts of employment and arrangements with foreign companies to properly assess the residency status of their employees.
Most taxpayers want to comply with tax rules and regulations. However, some of our existing ones are vague and can be interpreted differently. Hence, as part of the government tax reform plan to restructure individual tax rates, the BIR may need to revisit Section 22(E)(3), issue implementing guidelines, and provide clear-cut illustrations on when an individual qualifies as a non-resident.
The views or opinions expressed 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.
Jane R. Alcause-Fabro is a Director at the Client Accounting Services group of Isla Lipana & Co.,
(02) 845-27 28
jane.r.alcause@ph.pwc.com
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