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Immunity from Immunity:

A Supplementary Agreement Proposal
with International Organizations Related
to Taxation of Employees of International


Table of contents
A. Background of the study and statement of the problem
B. Definition of terms
C. Significance of the study
D. Objectives of the study
E. Methodology
F. Scope and limitation
II. Discussion
III. Recommendation: Proposed Supplemental Agreement
IV. Analysis
V. Conclusion
VI. Bibliography

5- 7
8 - 13


International Organizations (the Organization) are vested with international
personality originating from the charter that created them. This enables the Organizations to
pursue their legitimate purpose freely without submitting to the sovereign jurisdiction of the
State where the Organization is in operation. As a consequence of an international personality,
the State also recognizes certain immunities insofar as it concerns the operations of the
Tax exemption is one of the most prominent features of immunity enjoyed by the
Organization. The all-encompassing power of the State to tax is rendered inutile by the
immunity. Moreover, the tax exemption is absolute, insofar as the operation is concerned, which
involved both direct and indirect taxes.
In the Philippines, Organizations likewise enjoy almost absolute tax exemption.
Nonetheless, the tax exemption of the Organizations has to be properly delineated. The National
Internal Revenue Code (NIRC) clearly provides that a citizen of the Philippines residing
therein is taxable on all income derived from sources within and without the Philippines. The
NIRC did not distinguish whether the source of the income was derived from a taxable or an
exempt entity. What is being taxed is the income derived by the proper subject, i.e., the citizen
and not the source of income, i.e, the Organization. Hence, Filipino employees earning
compensation income from the Organization are required to pay taxes.
Individuals earning purely compensation income are paying their taxes through their
respective employers as an agent of the government by withholding the taxes due thereon from
the respective gross salaries of the employees and the same is remitted to the government on a
monthly basis. This system effectively negates tax evasion by imposing the responsibility to
withhold and remit the taxes to the employers under the penalty of deficiency tax assessments for
failure to withhold and certain penalties both civil and criminal. However the NIRC specifically
exempts the earnings derived by the employees of internal organizations from withholding tax on
wages on the basis of the immunity of the Organization, not due to the exemption of the
Based on the foregoing, a legal conflict now exists between the power of the government
to tax its subjects earning purely compensation income in a manner other than through the
withholding tax system versus the immunity of the Organizations from government compulsion to
provide necessary information other than the actual withholding of taxes for proper imposition
of tax on Filipino employees working therein.
The main proposition is that the government should have the power to legally pursue the
employees of the Organization through direct cooperation with the Organization to provide
information related to the employment of the Filipino citizens in order for the government to
properly administer the taxes on the said employees without necessarily violating the immunity.
In addition, it is recommended that the government instrumentalities be empowered to exercise
limited jurisdiction over the Organization just so it can reach its proper subjects without
necessarily encroaching upon the immunity. This stand may find support in the respective


charter itself that the Organization shall not be used as a shield to violate the laws of the
government. The immunity should not be used as a cloak for tax evasion. A recommendation is
also provided in this paper on how to address this conflict essentially through mutual
It is a clich that taxation is the lifeblood of the government and it should be collected
without unnecessary hindrance. Asian Development Bank (ADB) alone which, incidentally is
headquartered in the Philippines employs more than 3,000 Filipino employees and consultants
whose earnings have not been taxed since the its establishment in 1966.
This thesis suggests a simple and straightforward, yet a very effective means in raising the
much needed revenue for the government. If duly implemented, this proposition could generate
at least P300 million worth of taxes annually.



A. Background of the Study and Statement of the Problem
Every employer must withhold from compensations paid to its employees. While the
employer only serves as an agent of the government to exact the tax from the employee, the law
mandatorily imposed the duty to the employers under the penalty of deficiency tax or
disallowance of the related expenditure for failure to withhold as if the employer is the one
directly liable. The imposition of duty under the pain of a penalty for non compliance effectively
ensures the government, through the Bureau of Internal Revenue (BIR) that the employers will
appropriately remit the taxes due from its employees. In effect, it significantly reduced the
almost impossible duty of the BIR to run after each and every taxpayers earning purely
compensation income. To further illustrate, in a large manufacturing corporation employing
thousands of employees, the BIR instead of monitoring each individual employees for their tax
compliance will only have to monitor the employer and even penalize the latter for any
However, this system of withholding tax may not be applicable to all employers. There
are employers, which, by the very nature of their existence and operation are granted exemptions
and immunities from taxes including the duty to withhold. These employers include international
organizations and diplomatic offices of other countries with established physical operation in the
In example, ADB, which has an International Organization status, has a separate
agreement1 with the Philippine government. The said agreement explicitly provides privileges
including tax exemptions both direct and indirect taxes. The exemption covers the duty to
1 Agreement Between the Asian Development Bank and the Government of the Republic of the Philippines Regarding the Headquarters of the
Asian Development Bank, (http://www.adb.org/Documents/Reports/Charter/ADB_Phil_Agreement.pdf)


withhold and remit taxes from its employees, especially those who are citizens of the Philippines.
However, Article XII Section 45(b)2 also provides that exemption from taxation on or in respect
of the salaries and emoluments paid by the [ADB] subject to the power of the Government to tax
its nationals.
Interestingly, the exemption from duty to withholding finds support in the NIRC which
exempt wages received from the International Organization as exempt from the coverage of
withholding tax.3
Notwithstanding the exemption to withhold, it is clear that the income received by
employees who are citizens of the Philippines is subject to income tax. It is the Organization
which is exempt, which includes the duty to withhold, and not the employees.
Hence, the dilemma: How can the BIR properly impose the tax on these employees when
the employer is not duty bound to withhold the taxes. The situation if further aggravated by the
BIRs lack of information on the amount and source of income. While the BIR is not prevented
from requesting information from the Organization, the same may be validly rejected on the
immunity ground. This difficulty resulted in the improper tax enforcement which may range
from improper income declaration to a blatant tax evasion by these employees.
To illustrate the possible tax that could have been collected by the BIR, an employer such
as ADB employs around 3,000 professional and experienced employees. Assume that each
employee, on the average, earns a taxable income of Php 360,000 per year (Php 30,000 per
month, not considering the bonus and other taxable benefits). The tax that could have been
generated is almost Php 250 million per year. Take note that ADB has been in the Philippines
since 1966.
2 Ibid
3 Section 78 (A) (4) of NIRC provides that wage shall not include remuneration paid for services by a Citizen or resident of the Philippines for a
foreign government or an international organization


This paper recommends an amendatory provision or a supplemental agreement that will

give the BIR, as the official government instrumentality, free access to the employment records
including the respective income and other information pertaining only to the Filipino employees.
In this manner, the BIR will have a basis to impose the taxes and arrive at a feasible solution in
the absence of the withholding tax scheme. The agreement may contain the manner of payment
of taxes by the employees, the service of assessment notice, establishment of temporary or
permanent BIR office within the organizations premises based on the circumstances, etc. On the
other hand, the supplemental agreement should be carefully crafted and balanced to avoid undue
encroachment upon the exclusive jurisdiction of the organizations over its employees and the
foreseeable disruptions of the operations of these organizations. The agreement may contain
stipulations such as:

limitation on access to information; proper channeling of notice of

assessments to its employees; establishment of special period to file and pay their respective
income tax returns; granting of tax amnesties and protection from all forms of harassment and
threats. Lastly, in order to encourage payment the supplemental agreement may further stipulate
that the collections may be channeled to specific government projects consistent with the
objectives of these organizations.
Of course, this proposal is not expected to gain support specially from the employees
since this will materially affect their income. But a firm political will and a mutual cooperation
with these organizations will definitely result in benefits that shall outweigh the havoc that it may
initially create.


B. Definition of Terms
1. Employees.
The term employee refers to any individual who is the recipient of wages 4. As used in this
paper, employees pertain to Filipino employees working with the International Organizations.
These employees are resident citizens whose income is taxable derived from sources within and
without the Philippines.5

Section 2.78.3 of Revenue Regulations (RR) 02-98 issued on April 17, 1998 by the Bureau
of Internal Revenue (BIR) defines employee as:
The term employee is an individual performing services under an
employer-employee relationship. The term covers all employees, including
officers and employees, whether elected or appointed, of the Government of the
Philippines, or any political subdivision thereof or any agency or instrumentality.
In general, the relationship of the employer and employee exists when the
person for whom 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
by the work but also as to the details and means by which the result is
accomplished. An employee is subject to the will and control of the employer not
only as to what shall be done, but how it shall be done. In this connection, it is not
necessary that the employer actually directs or controls the manner in which the
services are performed. It is sufficient that he has the right to do so.
The right to dismiss an employee is also an important factor indicating that the
person possessing that right is an employer. Other factors or characteristics of an
employer, which may not be necessarily present in every case, are furnishing the
tools and furnishing of a place to work, to the individual who performs the
services. In general, an individual is not considered an employee if he is subject to
the control or direction of another merely on to the result to be accomplished by
the work, and not on to the means and methods for accomplishing the result.
In general, individuals who follow an independent trade, business, or
profession, in which the offer their services to the public, are not employees.

4 Section 78(C) of the NIRC

5 Section 23 (A) of the NIRC


The measurement, method or designation of compensation is also immaterial

if the relationship of employer and employee in fact exists.
No distinction is made between classes or grades of employees. Thus
superintendents, managers, and others belonging to similar levels are employees.
An officer of a corporation is an employee of the corporation. An individual,
performing services for a corporation, both as an officer and director, is an
employee subject to withholding on compensation, including director's fees.
2. Employer
Section 2.78.4 of RR 02-98 provides that the term employer means any person for whom an
individual performs or performed any service, of whatever nature, under an employer-employee
relationship. It is not necessary that the services be continuing at the time the wages are paid in
order that the status of employer may exist. Thus for purposes of withholding, a person for whom
an individual has performed past services and from whom he is still receiving compensation is an
It is the responsibility of the employer to withhold, pay, or refund the tax and furnish the
statements required under these Regulations. The term "employer" as defined in (A) and (B)
above is intended to determine who is the withholding agent.
An employer may be an individual, a corporation, a partnership, a trust, an estate, a jointstock company, an association, or a syndicate, group, pool, joint venture, or other unincorporated
organization, group or entity. A trust or estate, rather than the fiduciary acting for or on behalf of
the trust or estate, is generally the employer.
The term "employer" embraces not only an individual and an organization engaged in trade
or business, but it also includes an organization exempt from income tax, such as charitable and
religious organizations, clubs, social organizations and societes, as well as the Government of the
Philippines, including its agencies, instrumentalities, and political subdivisions.



Compensation Income
Section 2.78.1 (A) of RR 02-98 provides that in general, the term "compensation" means all

remuneration for services performed by an employee for his employer under an employeremployee relationship, unless specifically excluded by the NIRC.
The name by which the remuneration for services is designated is immaterial. Thus, salaries,
wages, emoluments and honoraria, allowances, commissions (e.g. transportation, representation,
entertainment and the like); fees including director's fees, if the director is, at the same time, an
employee of the employer/corporation; taxable bonuses and fringe benefits except those which
are subject to the fringe benefits tax under Sec. 33 of the NIRC; taxable pensions and retirement
pay; and other income of a similar nature constitute compensation income.
Remuneration for services constitutes compensation even if the relationship of employer and
employee does not exist any longer at the time when payment is made between the person in
whose employ the services had been performed and the individual who performed them.

4. Government.
Government as used in this thesis refers to the Philippine government including its
instrumentalities specifically the Bureau of Internal Revenue, the agency imbued with power to
administer income taxes.
5. Payroll period
Section 78 (B) of the NIRC defines payroll period as a period for which payment of wages is
ordinarily made to the employee by his employer.



6. Direct Tax
Direct taxes are those that are exacted from the very person who, it is intended or desired,
should pay them; they are impositions for which a taxpayer is directly liable on the transaction or
business he is engaged in.6 Examples are income tax, excise tax, documentary stamp tax.

7. Indirect Tax
On the other hand, indirect taxes are those that are demanded, in the first instance, from, or
are paid by, one person in the expectation and intention that he can shift the burden to someone
else. Stated elsewise, indirect taxes are taxes wherein the liability for the payment of the tax falls
on one person but the burden thereof can be shifted or passed on to another person, such as when
the tax is imposed upon goods before reaching the consumer who ultimately pays for it. When
the seller passes on the tax to his buyer, he, in effect, shifts the tax burden, not the liability to pay
it, to the purchaser as part of the purchase price of goods sold or services rendered. 7 Examples
are value added tax and withholding tax.

8. Withholding tax
In the operation of the withholding tax system, the payee is the taxpayer the person on whom
the tax is imposed, while the payor, a separate entity acts no more than an agent of the
government for the collection of the tax in order to ensure its payment.8

6 G.R. No. 140230, December 15, 2005, 478 SCRA 61, 71-72
7 Ibid
8 Mamalateo, Victoriano C. Philippine Income Tax First Ed 2004 (p. 379)


9. Creditable Withholding Tax.

Under the creditable withholding tax system, taxes withheld on certain income payments are
intended to equal or at least approximate the tax due of the payee on said income. The income
recipient is still required to file an income tax return, as prescribed in Sec. 51 and Sec. 52 of the
NIRC, as amended, to report the income and/or pay the difference between the tax withheld and
the tax due on the income. Taxes withheld on income payments covered by the expanded
withholding tax (referred to in Sec. 2.57.2 of these regulations) and compensation income
(referred to in Sec. 2.78 also of these regulations) are creditable in nature.

10. Tax Evasion

Tax evasion is a scheme used outside of those lawful means and when availed of, it usually
subjects the taxpayer to further or additional civil or criminal liabilities.9

11. Immunities
Because they enjoy international personality, they can also be given immunities and privileges of
international persons. Their immunities, however, have for basis not sovereignty, as it is for
States, but the need for the effective exercise of their function. 10

There is no common law

doctrine recognizing the immunity of international organizations. 11 Their immunities come from
the conventional instrument that created them. 12

9 Jose C. Vitug and Ernesto D. Acosta, Tax Law and Jurisprudence 44 (2nd ed., 2000)
10 Bernas, Joaquin. An Introduction to Public International Law. First Edition 2002 (p 315)
11 Id
12 Id


12. International Organization

An international organization is an organization that is set up by treaty among two or more states.
It is different from non government organizations (NGOs) which are set up by private persons. 13
Although international organizations have personality in international law, their powers and
privileges are by no means like those of States.14

13. Supplemental Agreement

This paper recommends a supplemental agreement which pertain to the annex to the existing
agreement or charter which shall empower the government to enforce tax on its proper subjects.

13 Id (p 312)
14 Id (p 314)


C. Significance of the Study

This thesis if implemented will generate steady revenue for the government without
difficulty of collection and administration, almost similar to regular corporations who are obliged
to withhold from its employees and remit to the BIR. The favorable resolution will augment to
the growing budget needs of the government.
It will also promote a sense of responsibility to the Filipino employees to take part in the
nation building and good governance by paying their correct taxes.
Lastly, it will also promote stronger alliance between the government and the
Organizations through its mutual cooperation for the achievement of its respective goals.

D. Objectives of the Study

The objectives of this study are:
1. To establish the legality of the power of the government to impose taxes over its proper
subject notwithstanding the immunity of the Organizations;
2. To frame and formalize an agreement supplementing the existing agreements to enable the
government and its instrumentalities to legally have access to information that will make it
feasible to administer tax while still respecting the immunity of the Organizations;
3. To adopt a long term and sustainable solution to hamper tax evasion without necessarily
violating the privilege of Organizations;
4. To strengthen ties and cooperation with the Organizations and government;
5. To create a legally enforceable and administratively feasible manner to increase the revenue
collection of the government; and



6. To apply the full extent of the law to glaring tax evaders subject to the power of the
government to grant tax amnesties and compromise agreements taking into consideration the
nature of the position the Filipino employees hold in the Organization.

E. Methodology
In order to write this thesis, the writer shall conduct research on the Organizations with
operations in the Philippines and ascertain the number of Filipino employees working therein. A
careful scrutiny of the respective charters and agreements to properly establish the nature of the
tax exemptions (i.e, whether it extends to the employees or limited to the organization) would be
used in this study. An extensive analysis of the power of the government to tax and the immunity
of the Organizations will be adopted so the proposed supplemental agreement will be crafted in a
manner that will both enforce the power and respect the immunity.

F. Scope and Limitations

As to the subjects, this study encompasses all organizations having the status as
international organization including but not limited to:
1. Asian Development Bank (ADB)
2. International Rice Research Institute (IRRI)
3. World Bank (WB)
4. United Nations and its Branches and Instrumentalities (UN)
5. International Organization for Migration (IOM).
However, the study does not include International Organizations with express provision
in their charter extending the tax exemptions to its Filipino employees. This does not intend to be



applicable to other diplomatic embassies maintained by the other countries as it may be very
costly to implement the proposal as it may require the execution of different bilateral agreements
for each country. But legally speaking, the same concept may be sustained. This study does not
likewise dwell on the taxability of alien employees who are working in the Philippines, absent
any express tax exemption.



International organizations with establishment in the Philippines and employ

An analysis of their respective charters focusing on the immunities, tax exemptions and

status of its employees as follows:

ADB charter and by laws and the agreement between ADB and the Philippines

United Nations Charter including its instrumentalities

International Organization for Migration charter

World Bank charter

IRRI charter
The applicable portions of the charter pertaining to the tax exemptions shall be duplicated

and analyzed to delimit and identify the proper scope of the study. Cases and jurisprudence, if
any shall be incorporated as well.


Immunity from any legal proceeding including jurisprudence

Citing some jurisprudence where the immunity is challenged and how the courts resolved it.




Immunity from taxation including jurisprudence

Citing jurisprudence on the tax exemption granted to the organization and how was it resolved.


Income taxation of individuals, a general perspective

This part should discuss the basic income taxation in the Philippines for individuals

including situs of taxation and some basic principles. Including jurisprudence.


Tax exemption vs. taxability of income derived by Filipino employees of

International Organization

This section should establish and discuss that Filipino employees who work with
International Organizations are NOT exempt from income taxation considering the discussions in
letters A to D.


Impediment for the administration of taxation on Filipino employees

This part will discuss the difficulty of administering tax on the Filipino employees, citing
some provisions in the respective agreements including the provision on the NIRC exempting the
wages received from the Organizations within the scope of the withholding tax system.




Recommendation: Proposed supplemental agreement


Access to the employment records by the BIR.

Access should be limited only to information as to enable the BIR to ascertain the amount

of income earned by the Filipino and compute for the correct income tax of the respective
Filipino employees.
This should include a detailed explanation on the manner the access will be given. The
options should be limited to either a right given to BIR to examine the records of the
international organization or a periodic report that the organizations undertake to be submitted to
the BIR.


Establishment of temporary or permanent BIR office within the organizations

This should clearly establish the physical boundary within which the BIR should have

physical access over the premises so as to ensure that the BIR will not unduly harass or threaten
Filipino employees


Allowance of service of assessment notices to Filipino employees in the

organizations premises
This should also include the proposed manner of servicing assessments through proper

channels within the organization in order not to disrupt the operations.


Securing necessary tax clearance with the BIR prior to release of last pay due to
retirement or resignation



The BIR would essentially have a lien over the last pay of the resignee/retiree. This
section should also discuss possible issues on encroachment on the jurisdiction and immunity of
the organization.


Administration of taxes prescribing the manner and date of filing and the mode
of payment, etc.
This portion shall provide a proposal for a special deadline and mode of payment so as

not to disrupt the operation of the organization, to ease the burden on the Filipino employee and
to harmonize with the organizations timing of paying salaries to Filipino employees.


Tax amnesty and/or compromise agreement for non payment of tax in the
previous taxable periods
This section should set a waiver of the 10-year prescriptive period of the BIR to assess as

a concession in exchange for a fixed amount as a form of compromise taking into consideration
the adverse impact to the operations of the organizations and to encourage tax compliance to
Filipino employees prospectively.


Proposed joint effort of the executive and legislative branch

Power of taxation is inherently vested in Congress. But the power to enter into

international agreement rests in the Executive department. Hence, tax matters embedded in an
international agreement should originate from which department in order to be binding?
The suggestion is a joint effort respecting the powers and competencies of each branch of
the government.




Securing approval from the respective organizations

This includes preliminary discussions with the representatives of the organizations.


Creation of a permanent group in the BIR to handle this matter

This is not part of the supplemental agreement but would be necessary should the

proposal be implemented. This may be handled internally within the government.




Feasibility of the supplemental agreement

This portion should provide a deep analysis of the advantages and disadvantages of the

proposal in order to weigh the likelihood that the same may be acceptable to respective


Doctrine of uniformity and equality of taxation

To provide an analysis whether the said proposal is consistent with the equality and
uniformity of taxation doctrine as embodied in the constitution.


An estimation of the possible inflow of revenue for the government

This section shall discuss the basic estimation of tax revenue that the government may get

from this proposal and the possible costs to be incurred.




Tax is the lifeblood of the government and should be collected without unnecessary

hindrance. International organizations, being clothed with immunities proved to be a strong force
against imposition of the tax on its rightful subjects: the Filipino employees working therewith.
By piercing through that shield of immunity by mutual cooperation through a
supplemental agreement, as discussed, the government can penetrate and legally ascertain the
taxes due which may be used to augment the finances for our government.
While this proposition may appear to be a difficult obstacle to hurdle, a strong political
will coupled with a good cause may be enough to make it through the finish line with flying
colors. It is high time that these professionals comply with their civic duties to pay their taxes
and not be left unnoticed indefinitely.
Finally, not only that this will bring revenue to the government, this proposition will also
balance the inequalities of life that tax has as one of its purpose and promote patriotism and
sense of responsibility for the country.




(Note: Some jurisprudence do not have their SCRA citation yet, temporarily used GR
Bernas, Joaquin. The 1987 Constitution of the Republic of the Philippines: A
Commentary. 2003 Edition
Bernas, Joaquin. An Introduction to Public International Law. First Edition 2002
Acosta, Ernesto and Vitug, Jose. Tax Law and Jurisprudence. Third Edition 2006
Mamalateo, Victorino. Philippines Income Tax. First Edition 2004
Presidential Decree No. 1620: Granting To The International Rice Research Institute
(IRRI) The Status, Prerogatives, Privileges And Immunities Of An International
Agreement Between the Asian Development Bank and the Government of the Republic
of the Philippines Regarding the Headquarters of the Asian Development Bank
Usaffe Veterans Association, Inc. vs. Treasurer of the Philippines, et. al., 105 Phil. 1030
World Health Organization and Dr. Leonce Verstuyft v. Hon. Benjamin Aquino, etc., et
al., 48 SCRA 242
United Nations Charter (http://www.un.org/en/documents/charter/index.shtml)
Philippine Acetylene Company versus Commissioner of Internal Revenue, et al., 127
Phil. 461
Southeast Asian Fisheries Development Center vs.Acosta, et. al., G.R. Nos. 97468-70
September 2, 1993
Commissioner Of Internal Revenue vs.John Gotamco & Sons, Inc. And The Court Of Tax
Appeals. G.R. No. L-31092 February 27, 1987
Eldepio Lasco, et. al., vs. United Nations Revolving Fund For Natural Resources
Exploration (UNRFNRE), G.R. Nos. 109095-109107 February 23, 1995
Ernesto L. Callado, Petitioner, Vs.International Rice Research Institute, Respondent. G.R.
No. 106483 May 22, 1995
Kapisanan Ng Manggagawa At TAC sa IRRI-Organized Labor Association In Line
Industries And Agriculture vs. Secretary Of Labor And Employment and International



Rice Research Institute, Inc., 190 SCRA 130

Department Of Foreign Affairs vs. National Labor Relations Commission. G.R. No.
113191 September 18, 1996
Davao Gulf Lumber Corporation v. Commissioner of Internal Revenue, et al., 293 SCRA
76, 88
Commissioner of Internal Revenue v. Acosta, etc.,G. R. No. 154068, August 3, 2007
Southern Cross Cement Corporation v. Cement Manufacturers Association of the
Philippines, et al., G. R. No. 158540, August 3, 2005
Lutz v. Araneta, 98 Phil. 148
Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647,
April 16, 2005
Commissioner of Internal Revenue, et al., v. Santos, et al., 277 SCRA 617
Banas, Jr. v. Court of Appeals, et al., G.R. No. 102967, February 10, 2000
People v. Castaneda, G.R. No. L-46881, September 15, 1988
Commissioner of Internal Revenue v. The Estate of Benigno P. Toda, Jr., , etc., G. R. No.
147188, September 14, 2004