Punongbayan & Araullo

March 23, 2007 BIR RULING [DA-174-07] DA 061-04 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty. Romeo H. Duran Tax Principal Gentlemen : This refers to your letter dated December 22, 2006 stating that your client, BRANDERS.COM (ROHQ), INC. (the ROHQ), is a company organized and existing under the laws of the Philippines with principal office address at the 17th Floor, Union Bank Plaza, Meralco Avenue, corner Onyx Road, Ortigas Center, Pasig City; that on the other hand, BRANDERS.COM, INC. (Branders USA), a US entity engaged in the wholesale and design of various business promotional items, gifts and giveaways on the Internet, has a Regional Operating Headquarter (ROHQ) in the Philippines, BRANDERS.COM (ROHQ), INC. (the ROHQ) with Securities and Exchange Commission (SEC) Registration No. FS20005663 issued on April 19, 2006; that the license issued to the ROHQ provides that it may engage in the 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; logistic services; research and development services and product development; technical support and maintenance; data processing and communication and business development; and that in order to carry out these operations, the ROHQ employed Filipino personnel to occupy the following managerial and technical positions: A. Engineer Manager 1. Responsible for over-all management of Engineering Department; 2. Responsible for hiring, evaluating and appraising of engineering department personnel; 3. Contributes to departmental rules and policies for Engineering Department; 4. Responsible for directing the work of business analysts, software engineers and software quality assurance engineers; 5. Responsible for planning, developing and implementing budget to ensure cost effectiveness; 6. Responsible for mentoring and training of staff; and 7. Responsible for over-all project management. B. Information Technology Director 1. Directs, plans and manages internal operations of the Company; 2. Directs and coordinates information systems and telecommunications services to both Branders.Com US and Philippine offices; 3. Plans, coordinates, and participates in the applications support activities systems and development activities network and technical services activities; 4. Provides highly technical and responsible staff assistance; 5. Manages special projects; and performs all other related duties; 6. Exercises staff oversight to ensure new operations plans, policies, procedures, and transition/migration plans are consistent with the overall company goals and objectives; and 7. Holds responsibility for IT staffing and budgeting projections on a company-wide basis. C. Senior Marketing Manager 1. Supervise a team of Marketing Analysts and Marketing Assistants; 2. Fill in for VP of Marketing when he is absent; 3. Analyze performance and identify opportunities for improving online customer acquisition through continuous monitoring and testing; 4. Track and measure performance of campaigns using statistical analysis in order to optimize results; 5. Direct website modifications and enhancements to improve website conversion; 6. Develop an understanding of the key conversion drivers in order to optimize campaigns to deliver maximum profit; 7. Drive analytical decision-making within the marketing department. Identify the data and structure analyses required to answer marketing questions and evaluate the performance of marketing programs; 8. Work closely with product and marketing managers to improve the caliber of our analytics; and 9. Track effectiveness of marketing programs and produce volume forecasts. D. Finance and Administration Manager 1. Handles PH & US finance and admin functions of the Branders group; 2. Preparation and continuous implementation of various accounting policies and procedures; 3. Set up of accounting system; 4. Overall monitoring/checking of financial transactions and accounting records and reports; 5. Preparation of various financial and management reports, i.e., BOD reports; 6. Taxation Implementation and Review; 7. Government Compliance; 8. Facilitate Financial Audit for PH and US; 9. Management of various HR and administrative functions of the Branders group, i.e., Hiring, Dismissal, Employee Benefits, Employee Relations, Training, Performance appraisal; 10. Preparation and continuous implementation of various HR, office and administrative policies and procedures; 11. Monitoring and update of employee requirements; 12. Coordination with lawyers, auditors, consultants, suppliers, etc.; 13. Project management and coordination; and 14. Supervision of direct reports, i.e., Checking & review of work, Training, Coaching and feedback, Hiring, Dismissal, Performance appraisal. E. Director for Employee Development and Services 1. Reports directly to the Chief Executive Officer; 2. Ensures that the Company has the productive people it needs in the right roles at the right time to achieve its objectives of profit and growth; and 3. Optimizes the Company's staffing, recruitment, retention, performance management, and separation processes and align these with the organization's business objectives. Based on the foregoing representations, you now request confirmation of your opinion that the positions of the ROHQ personnel enumerated above clearly require technical proficiency and initiative from the individuals occupying such position, hence, 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. In reply thereto, please be informed that Section 25 (C) of the Tax Code of 1997 provides that "(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 . . . ." 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 VIEW OF THE FOREGOING, since the positions of the ROHQ personnel enumerated above clearly require technical proficiency and initiative from the individuals occupying such position, 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. AIHaCc 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service