BIR Ruling [DA-043-06]

February 14, 2006 BIR RULING [DA-043-06] R.A. 8756; DA-061-04 Baniqued & Baniqued Suite 803, 8/F Jollibee Center San Miguel Avenue Pasig City Attention: Atty. Carlos G. Baniqued Atty. Terence Conrad H. Bello Atty. Madeline L. Zialcita-Villapando Gentlemen : This refers to your letter dated September 15, 2005 stating that your client, Coca-Cola Far East Ltd. (CCFEL) is a multinational company organized and existing under the laws of Hong Kong with a Regional Operating Headquarters (ROHQ) in the Philippines registered with the Securities and Exchange Commission (SEC) under SEC Registration No. BSFM-250 dated July 24, 2000; that under its license, CCFEL-ROHQ may engage in the following functions: general administration and planning; business planning and coordination; sourcing/procurement of raw materials and components; corporate finance advisory services; marketing control and sales promotion; training and personnel management; logistics services; research and development services, and product development; technical support and maintenance; data processing and communication; and business development; that the ROHQ is established in the Philippines to render any or all of the above services to its affiliates, branches and subsidiaries in the Philippines, in the Asia Pacific Region and other foreign markets; that the CCFEL has an affiliate in the Philippines, The Coca-Cola Export Corporation (TCCEC), which is registered with the SEC as a Branch of TCCEC USA, a corporation organized and existing under and by virtue of the laws of Delaware, United States of America, under SEC Registration No. 12-B dated December 11, 2001; that the TCCEC currently employs directors/managerial and information technology employees who will be transferred to CCFEL-ROHQ; and that the functions and responsibilities of the managerial and technical employees are as follows: A. Finance Director (a) responsible for providing advice and strategic thinking on business planning, budgeting, financial reporting, financial operations, commercial finance and other financial and general business matters, and recommends and implements company policy matters with managers of the affiliated companies; (b) handles and participates in the development of finance related projects and policies that have a global or regional impact and application to affiliates in Asia and/or worldwide; and liaises with the head office in Atlanta, USA and field offices around the world in relation thereto; (c) prepares and provides various financial reports to the Atlanta head office and other Coca-Cola affiliates in Asia; and (d) attends and participates in Asia-wide and worldwide Finance and other company conferences to discuss issues and recommend/institute new policies and best practices, and works closely with the finance directors and managers in the head office in Atlanta, as well as those of other Coca-Cola affiliates abroad. B. Managing Director (a) responsible for providing advice and strategic thinking in relation to marketing, advertising and promotional execution matters, as well as company policy matters to managers of affiliates; (b) handles and participates in marketing related projects having an Asia-wide impact or applicability; and liaises with the head office in Atlanta and field offices around Asia in relation thereto; (c) prepares and provides various marketing related reports to the Atlanta head office and other affiliates in Asia; (d) attends and participates in Asia-wide and worldwide Marketing and other company conferences to discuss issues and recommend/institute new policies and best practices, and works closely with the marketing directors and managers in the head office in Atlanta, as well as those of other Coca-Cola affiliates abroad. C. Technical Director (a) responsible for providing advice and strategic thinking on manufacturing, packaging, quality and other technical, as well as business matters, and recommends and implements company policy matters with managers of the affiliated companies; (b) handles and participates in the development of technical related projects and policies that have a global or regional impact and application to affiliates in Asia and/or worldwide; and liaises with the head office in Atlanta and field offices around the world in relation thereto; (c) prepares and provides reports to the Atlanta head office and other affiliates in Asia; and (d) attends and participates in Asia-wide and worldwide Technical and other company conferences to discuss issues and recommend/institute new policies and best practices, and works closely with the technical directors and managers in the head office in Atlanta, as well as those of other Coca-Coca affiliates abroad. D. Public Affairs and Communications Director (a) responsible for providing advice and strategic thinking on communications, media relations, public affairs, crisis resolution and citizenship strategies and programs, as well as business matters, and recommends and implements related company policy matters with managers of the affiliated companies; (b) handles and/or participates in Public Affairs and Communications projects, training programs and policies that have a global or regional impact and application to affiliates in Asia and/or worldwide; and liaises with the head office in Atlanta and field offices around the world in relation thereto; (c) prepares and provides reports on Public Affairs & Communications (PA&C) programs like the Healthy and Active Lifestyle Program, Environmental Protection and other matters to Atlanta and other affiliates in Asia; (d) attends and participates in Asia-wide and worldwide PA&C and other company conferences to discuss issues and recommend/institute new policies and best practices, and works closely with the PA&C directors and managers in the head office in Atlanta, as well as those of other Coca-Cola affiliates abroad. IADCES E. Operations Directors Carbonated Soft Drink (CSD), Non-Carbonated Beverage (NCB), Customer Business Development (CBD) (a) responsible for providing advice and strategic thinking on sales strategies, incentives and improvements, supermarkets strategies, as well as provide advice on and monitoring of implementation of sales promotions and activations of affiliated companies; (b) participate in operations marketing related training and development activities and/or programs and liaises with the head office in Atlanta and field offices around Asia in relation thereto; (c) prepare and provide various reports on sales promotions results, supermarket performance and other operational matters to the Atlanta head office and other affiliates in Asia; and (d) attends and participates in Asia-wide and worldwide functional and/or company conferences to discuss issues and recommend/institute new policies and best practices, and occasionally works with key accounts groups and/or other operations or marketing managers in the head office in Atlanta, as well as those of other Coca-Cola affiliates abroad. F. Human Resources Director (a) responsible for providing advice and strategic thinking on salaries, benefits, recruitment, training and development and other Human Resources, as well as business matters, and recommends and implements company policies with managers of the affiliated companies; (b) participates in training and development activities of HR related projects that have a global or regional impact and application to affiliates in Asia and/or worldwide; and liaises with the head office in Atlanta and field offices around the world in relation thereto; and (c) attends and participates in Asia-wide and worldwide HR and other company conferences to discuss issues and recommend/institute new policies and best practices, and works closely with the HR directors and managers of other Coca-Cola affiliates abroad. G. Legal and Transactions Counsel (a) provides advise on legal and company policy matters to managers of the local affiliates and other legal managers of affiliates in Asia; (b) handles mergers and acquisitions, and related transactions for affiliates in Asia (such as recently completed disposals and acquisitions in Vietnam, Cambodia, Nepal, Sri Lanka and Hong Kong), and liaises with the head office in Atlanta and field offices around the world in relation thereto; and (c) attends and participates in Asia-wide and worldwide legal and other company conferences to discuss issues and recommend best practices, and works closely with the legal counsels in the head office in Atlanta, those of Coca-Cola affiliates in Asia and members of the worldwide transactions network. Based on the foregoing representations, you now request confirmation of your opinion that Filipino employees occupying the above-described positions are considered managerial and technical employees subject to the 15% preferential tax rate based on the gross income or the regular tax rate based on their taxable income, regardless of whether there is an alien occupying the position similar to that of the Filipino employees. In reply thereto, please be informed that Section 25 of the Tax Code of 1997 provides "Sec. 25(3)(C). Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies . There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area headquarters and regional operating headquarters, 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 multinational companies. . . . ." In relation thereto, Article 61 of R.A. No. 8756 provides "Art. 61. Withholding Tax of 15% on Compensation Income . Aliens employed by the regional or area headquarters and regional operating headquarters of multinational companies shall be subject for each taxable year upon their gross income received as salaries, wages, annuities, compensations, remuneration and emoluments to a tax equal to fifteen percent (15%) of such gross income. The same tax treatment is applicable to Filipinos employed and occupying the same positions as those aliens employed by multinational companies: Provided; That said Filipinos shall have the option to be taxed at either 15% of gross income or at the regular tax rate on their taxable income in accordance with the National Internal Revenue Code." Moreover, Section 10 of the Implementing Rules of R.A. No. 8756 provides "Sec. 10. Withholding Tax of 15% on Compensation Income . Alien executives occupying managerial and technical positions employed by the regional or area headquarters and regional operating headquarters of multinational companies shall be subject for each taxable year upon their gross income received as salaries, wages, annuities, compensations, remunerations and emoluments to a final tax equal to fifteen per centum (15%) of such gross income. The same tax treatment is applicable to Filipinos employed and occupying the same positions as those aliens employed by multinational companies, regardless of whether or not there is an alien executive occupying the same position. Qualified Filipino employees shall have the option to be taxed at either 15% of gross income or at the regular tax rate on their taxable income in accordance with the National Internal Revenue Code, as amended by R.A. No. 8424." In applying the aforesaid laws, this Office in BIR Ruling No. DA061-04 dated February 12, 2004 ruled that "IN THE LIGHT OF ALL FOREGOING, since the positions of the CSPHL-ROHQ personnel enumerated above clearly require technical proficiency and initiative from the individuals occupying such position, hence, this Office holds that such employees shall be subject to either the preferential tax rate of 15% or to the regular tax rate based on their taxable income, regardless of whether there is an alien similarly occupying such technical or managerial positions." SUCH BEING THE CASE, qualified Filipino managerial and technical employees to be transferred from TCCEC to CCFEL-ROHQ have the option to either be subject to the 15% final withholding tax on gross income or the regular tax rate under the Tax Code of 1997. aCTHDA 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. Very truly yours , (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue