Taxation of those employed in embassies

PHILIPPINE nationals and alien individuals employed by foreign governments, embassies, diplomatic
missions and international organizations based in the Philippines have this impression that the salaries
they receive from their employment are exempt from income tax.
Apparently, this view is anchored on their misunderstanding of the rule that foreign governments,
embassies, diplomatic missions and international organizations situated in the Philippines acting as
employers enjoy immunity from collecting taxes on salaries and emoluments of their employees, whether
they are foreigners or Philippine nationals.
The immunity referred to under this rule refers actually to immunity from being constituted as withholding
agents of the Philippine government, which is accorded said foreign entities on the basis of international
comity as embodied in several international agreements to which the Philippines is a signatory, e.g.,
Vienna Convention for International Relations, Convention on the Privileges and Immunities of the United
Nations.
This immunity from the withholding tax obligation is further reiterated in Section 2.78.1(B)(5) of Revenue
Regulations (RR) No. 2-98, otherwise known as the Withholding Tax Regulations, which exempts from the
withholding tax system the remunerations paid by foreign governments and international organizations to
their employees who are resident or nationals of the Philippines.
The confusion created by the above provision has prompted the Bureau of Internal Revenue (BIR) to
issue Revenue Memorandum Circular (RMC) No. 31-2013 to further clarify the tax treatment of this
transaction.
Under RMC No. 31-2013, it has been clarified that the exemption from withholding taxes on
compensation of officials and employees applies to foreign governments, embassies, diplomatic missions,
and international organizations, and that such exemption refers only to the obligation to collect tax, and
therefore does not equate to the exemption from paying the income tax itself.
Section 23 of the Tax Code clearly subjects resident citizens of the Philippines on all income derived from
all sources, and alien individuals, whether resident or non-resident, on income derived from Philippine
sources, to Philippine income tax.
However, most international agreements which grant withholding tax immunity to foreign governments,
embassies, diplomatic missions, and international organizations also grant exemption to their officials and
employees who are foreign nationals and/or non-Philippine residents from paying income tax on their
salaries and emoluments.
In these instances, RMC 31-2013 emphasizes that the exemption granted should apply only to those
individuals who are expressly and unequivocally identified in said international agreements or laws, and
shall not extend to those not specifically mentioned as tax exempt.
In other words, employees who are not specifically mentioned as tax exempt in the international
agreement or law shall be subject to the general rule on taxability of Philippine nationals and alien
individuals as espoused in Section 23 of the Tax Code.
Accordingly, their compensation and emoluments are subject to Philippine income tax, but exempt from
withholding tax because their employer is exempt from the obligation to withhold tax.
Consequently, it shall be incumbent upon the individual employees to report their income to the BIR and
pay the taxes due thereon as required under Section 24 of the Tax Code.
RMC No.31-2013 has further identified the specific individuals who are exempt from income tax as

mentioned in the various international agreements, which I have enumerated briefly as follows:
1. Those employed by foreign embassies/foreign missions, who are:
Diplomatic agents who are not nationals or permanent residents of the Philippines;
Members of the family of the diplomatic agent forming part of his/her household who are not Philippine
nationals;
Members of the administrative and technical staff of the mission together with members of their families
forming part of their respective households who are not nationals or permanent residents of the
Philippines;
Members of the service staff of the mission who are not nationals or permanent residents of the
Philippines; and
Private servants of members of the mission who are not nationals or permanent residents of the
Philippines.
2. Those employed by aid agencies of foreign governments, as identified in the agreement in place;
3. Those employed by the United Nations and its specialized agencies, as identified in the agreement in
place;
4. Those employed by organizations covered by separate international agreements or specific provisions
of law, as identified in the agreement in place; and
5. Employees of other aid agencies or international organizations, as identified in the agreement in place;
Exemption of employees of aid agencies or international organizations who are not mentioned in RMC
No. 31-2013 will be evaluated based on the terms of the applicable articles of agreement, charters or host
agreements; or existing laws granting tax exemptions or privileges to said agencies or organizations.
Employees, whether Philippine nationals and non-residents, who are not specifically identified under duly
recognized international agreements or local laws are required to file their annual income tax returns on
or before the 15th day of April of each year using BIR Form No. 1700 or 1701, whichever is applicable,
declaring their respective compensation income for the preceding taxable year for services performed for
such foreign entity or international organization.
Employees who failed to file their annual tax returns for the taxable year 2012 because of the confusion
on the proper tax treatment of their compensation income, are allowed up to May 15, 2013 to file their
2012 income tax returns and pay the taxes due on their compensation income without surcharge, interest,
and compromise penalty for late payment, as provided under RR No. 7-2013.
Abatement of surcharge, interest, and compromise penalty shall apply provided the foreign governments,
embassies, diplomatic missions and international organizations acting as employers of these individuals
filed a summary list of their employees who are not tax exempt as of Dec. 31, 2012 before May 10, 2013.
Although the deadline prescribed by RR No. 7-2013 has lapsed, RMC No. 31-2013 serves as an effective
guidance to individual employees of foreign governments, embassies, diplomatic missions, and
international organizations on the proper tax treatment of their compensation income.