Taxation of compensation income of employees of foreign governments and international organizations

Foreign governments and international organizations enjoy immunity from Philippine taxes, including withholding taxes on salaries and emoluments of their employees.  This immunity is accorded on the basis of international comity such as the Vienna Convention for International Relations (for embassies and diplomatic missions), Convention on the Privileges and Immunities of the United Nations, Convention on the Privileges and Immunities of Specialized Agencies (for the various agencies of the United Nations, Asian Development Bank Headquarters Agreement (for ADB), Articles of Agreement of the International Finance Corporation, among others, to which the Philippines is a signatory.  Thus, Revenue Regulations No. 2-98, as amended, expressly provides that remuneration being paid by foreign governments and international organizations to their employees are exempt from withholding tax on compensation. 

Unfortunately, the exemption from withholding tax has caused some confusion as to the proper tax treatment of the compensation income earned by foreign nationals and Philippine nationals employed by foreign governments and/or international organizations based in the Philippines.

To clarify this issue, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) 31-2013 dated April 12, 2013 providing guidelines on the taxation of compensation income of employees of foreign government and/or international organization based in the Philippines.  Under RMC No. 31-2013, the tax treatment of the compensation income of employees of foreign governments and international organizations based in the Philippines shall be as follows:

Sheryl Mae T. Amarille-Vegilla is a Manager  from the Tax Group of Manabat Sanagustin & Co. (MS&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The view and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or MS&Co. For comments or inquiries, please email [email protected] or [email protected].