BIR Ruling [DA-081-05]

March 11, 2005 BIR RULING [DA-081-05] Sec. 25 (C); BIR Ruling No. 147-98; DA 246-02 Ms. Debbie Caw 15/F, One Executive Office Bldg. Col. Martinez cor. West Avenue Quezon City M a d a m : You stated in your letter dated December 7, 2004 that Birgma Asia, Inc .is established as a regional headquarter in the Philippines; and that you are requesting for a ruling on the income tax rate applicable to your local employees occupying the following positions: 1) Regional Finance Controller 2) Consultants 3) Chief Accountant/Accounting Manager/Supervisor/Staff 4) Information Technology Manager/Supervisor/Staff 5) Purchasers 6) Maintenance Staff/Messenger/Janitor In reply, please be informed that Section 25(C) of the Tax Code of 1997 as implemented by 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 provides, viz : "(D) Income Derived by Alien Individuals Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. xxx xxx xxx The same tax treatment is applicable to Filipinos employed and occupying the same positions as those aliens employed by regional or area headquarters and regional operating headquarters of multinational companies, regardless of whether or not there is an alien executive occupying the same position, provided, that such 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 Tax Code of 1997 if the employer (Regional Operating Headquarters/Regional or Area Headquarters) is governed by Book III of E.O. 226 as amended by R.A. 8756. In case the Filipino opted to be taxed at the regular tax rate under Section 24 of the Tax Code of 1997, the provisions of Section 2.79(A) to (D) of Revenue Regulations 2-98 shall apply. aTHCSE xxx xxx xxx." The expatriate employees of Regional Operating Headquarters in the Philippines are subject to tax at the rate of 15% on their gross compensation income. The term "expatriate employees" however, is classified to refer only to aliens employed in managerial, confidential or highly technical positions. Thus, under Philippine Labor Law, the employment of non-resident aliens is limited only to positions which are managerial or highly technical in nature or where there are no Filipinos who are competent, able and willing to perform the services for which the aliens are desired. However, if Filipinos are employed and occupying managerial or technical positions as those of aliens employed by the regional headquarters or representative office, they are likewise, subject to the preferential tax rate of 15% on their gross compensation income. Clearly, the rationale for this proviso is to equalize the enjoyment of the preferential tax rate accorded to an alien with a Filipino who is occupying a similar position in the regional headquarters. However, the preferential tax treatment shall apply only in cases where concurrently an alien holds a position similar to that of the Filipino employee. The objective of the law to equalize the tax treatment of an alien and a Filipino is no longer applicable in a situation where there is no alien employed. Based on the foregoing, only your employees occupying managerial, confidential or highly technical positions have the option to be taxed at either 15% of their gross income or the graduated tax rates of 5%-32% in accordance with Section 24 of the Tax Code of 1997 as implemented by Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001 and 12-2001. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group