Kronge Konsult, Inc. (KKI) is a Philippine corporation engaged in architectural design, engineering, and construction work. Its principal office is located in Makati City, but it has various infrastructure projects in the country and abroad. Thus, KKI employs both local and foreign workers. The company has adopted a policy that the employees’ salaries are paid in the currency of the country where they are assigned or detailed.
Below are some of the employees of KKI. Determine whether the compensation they received from KKI in 2017 is taxable under Philippine laws and whether they are required to file tax returns with the Bureau of Internal Revenue (BIR). (2% each)
(a) Kris Konejero, a Filipino accountant in KKl’s Tax Department in the Makati office, and married to a Filipino engineer also working in KKI;
(b) Klaus Kloner, a German national who heads KKl’s Design Department in its Makati office;
(c) Krisanto Konde, a Filipino engineer in KKl’s Design Department who was hired to work at the principal office last January 2017. In April 2017, he was assigned and detailed in the company’s project in Jakarta, Indonesia, which project is expected to be completed in April 2019;
(d) Kamilo Konde, Krisanto’s brother, also an engineer assigned to KKl’s project in Taipei, Taiwan. Since KKI provides for housing and other basic needs, Kamila requested that all his salaries, paid in Taiwanese dollars, be paid to his wife in Manila in its Philippine Peso equivalent; and
(e) Karen Karenina, a Filipino architect in KKl’s Design Department who reported back to KKl’s Makati office in June 2017 after KKl’s project in Kuala Lumpur, Malaysia was completed.
Suggested answer only. Not an official answer and not legal advice.
**Answer:** (a) Kris: Taxable; file ITR unless under substituted filing. (b) Klaus: Taxable; file ITR unless under substituted filing. (c) Krisanto: Jan-Mar PH income taxable; Apr-Dec foreign income exempt/no ITR. (d) Kamilo: Foreign income exempt; no ITR. (e) Karen: Jan-May foreign income exempt; June-Dec PH income taxable.
**Legal Basis:** Under Sections 23, 24, and 51-A of the NIRC, resident citizens and aliens are taxed on PH income and qualify for substituted filing. Non-resident citizens are exempt on foreign income and need not file returns thereon.
**Application:** Kris and Klaus earn taxable PH income. Krisanto (Apr-Dec), Kamilo, and Karen (Jan-May) are non-resident citizens exempt on foreign earnings. Krisanto (Jan-Mar) and Karen (June-Dec) earn taxable PH income.
**Conclusion:** Thus, PH compensation is taxable subject to substituted filing, while foreign income of non-resident citizens is tax-exempt.
This is not an official scoring system and carries no weight with the Supreme Court or any bar review provider. It measures how much of the suggested answer's wording your response covers, not whether your reasoning is correct. For practice only.
Quick check
Under Section 23 of the Tax Code, which taxpayer is taxable on income derived from sources both within and outside the Philippines?
Resident citizens are the only individual taxpayers subject to Philippine income tax on world income derived from both domestic and foreign sources.
How is a Filipino employee assigned abroad for more than 183 days during the taxable year classified for tax purposes?
Under Section 22(E) of the Tax Code, a Filipino citizen residing and working abroad for most of the year is classified as a non-resident citizen.
What determines the source of compensation income for individual income tax purposes under Section 42 of the Tax Code?
Under Section 42 of the Tax Code, the source of compensation income is strictly determined by the place where the labor or services are actually performed.
If a non-resident citizen worker receives foreign salary remitted directly to a spouse in Manila in Philippine Pesos, is that salary taxable in the Philippines?
Income earned by a non-resident citizen for services performed abroad remains tax-exempt foreign income regardless of remittance place or currency.
Which employee is required to personally file an annual individual income tax return with the BIR?
Employees receiving taxable compensation from multiple employers during the same taxable year do not qualify for substituted filing and must personally file an ITR.
Learn more about these topics
1. Taxability of Compensation
Under Section 23 of the National Internal Revenue Code, resident citizens and resident aliens are taxable on income derived from sources within the Philippines. Non-resident citizens are taxable only on income derived from Philippine sources and are exempt from Philippine income tax on income earned from foreign sources. Compensation income for services rendered within the Philippines constitutes Philippine-source income subject to income tax. Conversely, compensation for labor or personal services performed outside the Philippines constitutes foreign-source income.
2. Non-Resident Citizen Exemption
Under Section 22(E) of the Tax Code, a Filipino citizen who works and derives income from abroad, requiring physical presence abroad for most of the taxable year, is classified as a non-resident citizen. Non-resident citizens are exempt from Philippine income tax on compensation earned for services rendered outside the country. This tax exemption applies regardless of where or in what currency the salary is remitted or paid, even if paid in Philippine Pesos to a resident spouse in Manila.
3. Substituted Filing Mechanism
Under Section 51-A of the Tax Code, individual taxpayers receiving purely compensation income from a single employer during the taxable year whose income tax has been correctly withheld qualify for substituted filing. The employer's annual information return filed with the Bureau of Internal Revenue serves as the employee's substitute income tax return. However, employees with multiple employers, mixed income, or taxable foreign income not subject to Philippine withholding tax must personally file an annual income tax return.