BIR Ruling [DA-061-04]

February 12, 2004 BIR RULING [DA-061-04] R.A. 8756; 118-2003; 147-98; 032-02 Joaquin Cunanan & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Ms. Tomasa H. Lipana Managing Partner/Tax Services Gentlemen : This refers to your letter dated December 1, 2003 requesting on behalf of your client; Cypress Semiconductor Philippine Headquarters, Ltd.-Regional Operating Headquarters (CSPHL-ROHQ), for a ruling on whether the positions held by certain Filipino personnel of the company qualify as managerial and/or technical positions and are therefore entitled to the 15% preferential tax rate under Section 25(C) of the Tax Code of 1997 and Section 61 of R.A. No. 8756. It is represented that CSPHIL is a multinational company organized and existing under the laws of the Cayman Islands with an ROHQ in the Philippines registered with the Securities and Exchange Commission under SEC Registration No. A200114939 dated October 3, 2001; that under its license, the CSPHL-ROHQ may engage in general administration and planning, business planning and coordination, corporate finance advisory services, training and personnel management, research and development services, and product development, technical support and maintenance, data processing and communication, and business development; that ROHQ was 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; and that to carry out these operations, CSPHL-ROHQ employed Filipino personnel to occupy the following technical positions: 1. Tax Analyst responsible for maintaining a proactive work ethics supporting tax compliance and tax minimization efforts for a myriad of Cypress legal entities worldwide and for supporting the Cypress San Jose Tax Department in driving successful completion of broad tax initiatives, tax audits and tax planning for all applicable companies across the Cypress group. He devotes approximately 600 hours annually managing USA sales/use tax compliance process and 400 hours supporting income tax compliance. 2. Credit Analyst responsible for reconciling and analyzing the status of long overdue invoices; investigating and following up issuance of credit memos; recommending accounts for write-off; ensuring and evaluating that credit terms properly adhered to; recommends credit hold warnings; attending to queries and problems regarding credit matters; ensuring good and professional customer relations in all collections; and preparing Aging and Metrics of Accounts Receivables for weekly meetings. These services are rendered for a US affiliate. 3. Financial Analyst (Corporate Finance) responsible for preparing financial data for Board of Directors; preparing and coordinating with Controllers/Directors regarding the general and admin forecast; updating the Internet Financial Graphs to be uploaded in the website; preparing monthly reports; and reviewing of all charges made to a division in the US (DIV980) and making adjustments/reclassifications, if necessary. These services are rendered for a US affiliate. 4. Product Line Financial Analyst responsible for reconciling, reporting and analyzing direct spending, labor and depreciation, variances in costs, inventory, scrap, and yields; and reporting weekly revenue and bookings. These services are rendered for the Memory Product Division of a US affiliate. DEIHAa 5. Fixed Assets Supervisor responsible for maintaining fixed assets-subledgers; transacting fixed assets movement/updates in the Oracle System: preparation of monthly Balance Sheet reconciliation; publishing monthly reports, managing fixed assets metrics, coordination of annual physical audit; review progress reports and monitors aging; preparation of a depreciation forecast; and preparation of a fixed assets summary in the monthly close meeting. These services are rendered for CSPHL-ROHQ and the latter's affiliates in the Cayman Islands. 6. Senior Accountant responsible for consolidating the financial statements of regional affiliates; reconciliation and analyses of balance sheet accounts of regional affiliates; reconciliation of intercompany account balances; and preparation of intercompany invoices. One Senior Accountant renders services for the Asia Pacific affiliates, while another handles the European affiliates. 7. Senior Buyer responsible for negotiating with suppliers to achieve cost saving/reduction; evaluating purchasing policies and procedures and recommending improvements; evaluating purchasing reports and investigating and acting on open purchase orders; working with Accounts Payables to facilitate payment to suppliers; participate in sourcing out suppliers that can provide the company quality goods/service and on time delivery; ensuring accuracy in generating purchase orders and placing of orders; and maintaining good business relationships with supplier and customers. These services are rendered for US affiliates. In reply thereto, please be informed that Section 25(C) of the NIRC, reads: "(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 are 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. . . ." Corollarily, Section 2.57.1(D) of Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001, and as further amended by Revenue Regulations No. 12-2001 and Section 10 of the Rules and Regulations Implementing Article 61 of R.A. No. 8756 provide that 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, compensation, remuneration and emoluments to a final tax equal to fifteen percent (15%) of such gross income and that the same tax treatment is applicable to Filipinos employed and occupying the same positions as those aliens, regardless of whether or not there is an alien executive occupying the same position. However, 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 Tax Code of 1997. In case of the latter, the withholding tax rates under Sections 2.78 and 2.79 of Revenue Regulations No. 2-98 shall apply. 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. ( BIR Ruling No. 118-2003 dated April 14, 2003 ) 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 Deputy Commissioner Legal & Inspection Group