Bir Ruling No. Itad 018-14: ADB Filipino employees not exempt from payment of income taxes

It has been a long standing principle in Philippine tax law that exemptions are strictly construed against the taxpayer. The taxpayer must be able to point to a specific provision of the law which expresses exemption in clear and categorical terms before such exemption may be granted.

In its letter requesting confirmation of tax exemption from payment of income tax from salaries/emoluments, Asian Development Bank (ADB) Filipino employees, through its counsel, point to the Agreement between the Government of the Republic of the Philippines and The Asian Development Bank regarding the headquarters of the Asian Development Bank (ADB Headquarters Agreement) as legal basis to support their claim for exemption.

ADB Headquarters Agreement provides for exemption from taxation on or in respect of the salaries and emoluments paid by the Bank “subject to the power of the Government to tax its nationals.” The Philippine Senate, through Senate Resolution No. 6 dated 16 March 1966 concurred in ratifying the ADB Headquarters Agreement but subject to the reservation of the Philippines’ right to tax the salaries and emoluments of its nationals.

ADB Filipino employees in the same letter claim that such “reservation” was used not as a categorical declaration that it retains the right to tax salaries and emoluments paid by ADB to its employees who are Philippine nationals/citizens, but used only in its ordinary meaning—that it may or may not be exercised—and that there must be an operative act, apart from the reservation itself, for the purported modification to be realized.

Disagreeing with this interpretation, the BIR, in BIR Ruling No. ITAD 018-14 dated 19 February 2014, stated that the “reservation” made by the Philippines is not a mere reservation but an affirmation of the inherent power of the State to tax its own citizens. That the Philippines by making a “reservation” simply intimated that entering upon an Agreement with ADB provides the effect that ADB income is exempt from tax by virtue of the Agreement but not the income derived by the Filipinos from ADB which is still taxable income. That there is no need for an executing law to implement the “reservation,” because Philippine tax law already provides that Filipinos are liable for tax on income derived from within and without the Philippines, and that the construction of the word “reservation” can only be accorded its plain meaning if, before the Philippines entered into the Agreement with ADB, Filipinos earning income from without the Philippines have no obligation to pay taxes in the Philippines, but since 1933, Filipinos earning income derived outside the Philippines are liable for tax from such income.

ADB Filipino employees also argued that the fact that they are not covered by the Philippine labor law, the Social Security System (SSS), Pag-IBIG and other mandatory benefits accorded to Filipino employees only means that since they are treated by our labor laws differently, they are also to be treated differently in so far as our tax laws are concerned. But the BIR countered in the same ruling that ADB Filipino employees are not “not covered” by the mandatory benefits accorded to Filipino employees by government-controlled insurance/pension companies, and that the exemption as tax withholding agent of their employer (ADB) is the only reason the ADB Filipino employees are not covered/members of the government-controlled insurance/pension companies, but their situation does not preclude them from being beneficiaries/members of the said companies as they may opt to register and voluntarily pay contributions to the said government-controlled insurance/pension companies.

With BIR Ruling No. ITAD 018-14, together with Revenue Memorandum Nos. 31-2013 and 73-2013 on the tax treatment of those employed by the United Nations and its specialized agencies, providing clarifications therefor as well as additional guidelines on the tax filing obligations of individual taxpayers concerned, the position of the BIR as to the taxability of income received by ADB Filipino employees from the bank is without doubt.

It is noteworthy that such position stands against the representation of ADB Filipino employees that “for almost Fifty (50) years, ADB employees have never been subjected by the taxing authority to income tax.” Be that as it may, the passage of time is not a source of exemption from tax liability. And any doubts must be resolved against the taxpayer claiming exemption.

Katrina Elena D.F. Guerrero is a supervisor from the tax group of R.G. Manabat & Co. (RGM&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.

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