BIR Ruling [DA-038-99]

January 22, 1999 BIR RULING [DA-038-99] Joaquin Cunanan & Co. 14/F Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: Ms . Tomasa H . Lipana Managing Partner Tax Services Gentlemen : This refers to your letter dated November 25, 1998 requesting for a confirmation of your Opinion at an alien executive employed by your client and hired locally to occupy the position of Vice-President Commercial Department as well as Filipinos employed by your client occupying a similar position are subject to the 15% final withholding tax on the gross income they receive from your client. aisadc It is represented that Credit Lyonnais is a foreign corporation authorized to do business in the Philippines through its Manila Offshore Bank (OBU); that an alien has been hired locally by the OBU as Vice-President Commercial Department; that it has moreover employed four Filipinos for the position of Vice-President Operations & Comptrollership, Vice-President Special Projects, Vice-President Credit Control Department and Vice President Treasury; that these managerial positions in the OBU belong to the category of "top management" as they are vested with powers to execute management policies and formulate major decisions within their areas of expertise and responsibility. In reply thereto, please be informed that Section 25(D) of the National Internal Revenue Code (as amended by Republic Act No. 8424 otherwise known as the Tax Reform Act of 1997), as implemented by Section 2.57(E) of Revenue Regulations No. 2-98 provides as follows: "(D) Alien Individual Employed by Offshore Banking Units . There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by offshore banking units established in the Philippines as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such offshore banking units, a tax equal to fifteen percent (15%) of such gross income: Provided, However, That the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by these offshore banking units." In view of the foregoing the alien executive employed by your client (an OBU) as Vice President-Commercial Department as well as its Filipino executives occupying similar (Vice-President) position are subject to the preferential tax rate of 15% (instead of the graduated rates of 5% to 34%) on the gross income (such as salaries bonuses and other emoluments) they receive from your OBU client. Furthermore, this preferential tax treatment shall not apply where the counterpart expatriate is recalled to the head office or reassigned elsewhere, whether temporarily or otherwise, and only Filipinos are the ones so employed by an OBU for the time being. The same answer obtains where the post vacated by the expatriate is subsequently assumed by a Filipino to replace the expatriate and as a result of which all top management posts are not being occupied by Filipinos. Therefore, this Office hereby holds that in all instances where there is no expatriate present and working in the establishment, there being no disparity to speak of with respect of the tax rate imposed on the income earned by the Filipinos, said Filipino managers employed by OBUs shall be liable to the normal income tax rates imposed under Sec. 24(A)(1)(c) of the Tax Code of 1997. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. (BIR Ruling No. 147-98 dated October 16, 1998) cdta Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)