Picazo Buyco Tan Fider & Santos Law Offices

March 26, 2008 BIR RULING [DA-197-08] 25 (C); RR 12-2001; DA-021-2004; VAT Ruling No. 035-2001 Picazo Buyco Tan Fider & Santos Law Offices 18th, 19th & 17th Floors, Liberty Center 104 H.V. dela Costa Street Salcedo Village, Makati City Attention: Atty. Ma. Adelina S. Gatdula Gentlemen : This refers to your letter dated February 19, 2008 requesting on behalf of your client, Lawson Software, Inc. (Lawson for brevity), a multinational corporation organized and existing under the laws of Delaware, USA, with affiliates, subsidiaries and/or branches in the Asia-Pacific Region and other foreign market such as the Americas, Europe, Middle East and Asia, for a ruling on whether or not the positions held by aliens and certain Filipino personnel of the company qualified as managerial and/or technical positions are entitled to the fifteen percent (15%) preferential tax rate under Section 25 (C) of the Tax Code of 1997 and Section 61 of Republic Act (RA) No. 8756, otherwise known as "An Act providing for the Terms, Conditions and Licensing Requirements of Regional or Area Headquarters, Regional Operating Headquarters, and Regional Warehouses of Multinational Companies". As represented, Lawson was duly licensed by the Securities and Exchange Commission (SEC) on February 8, 2008 with the consent of the Board of Investments (BOI), to establish a Regional Operating Headquarters (ROHQ) in the Philippines. It has a Certificate of Registration and License with Company Registration No. FS200801992 (the "Certificate of Registration"). As stated in the Certificate of Registration, Lawson may render the following qualifying services to its affiliates, branches and subsidiaries in the Philippines, in the Asia-Pacific Region and other foreign markets; 1. general administration and planning; 2. business planning and coordination; 3. sourcing/procurement of raw materials and components; 4. corporate finance advisory services; 5. marketing control and sales promotion; caCSDT 6. training and personnel management; 7. logistic services; 8. research and development services, and product development; 9. technical support and maintenance; 10. data processing and communications; and 11. business development. To carry out its various functions, Lawson intends to employ alien and Filipino personnel to occupy managerial and technical positions. In reply thereto, please be informed that Section 25 (C) of the 1997 Tax Code states 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. . . ." In addition, Section 2.57.1 (D) of Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001, and as further amended by RR No. 12-2001, reads: "(D) Income Derived by Alien Individuals Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. DSTCIa xxx xxx xxx The same tax treatment is applicable to Filipinos employed and occupying the same positions as those of 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 rate on their taxable income in accordance with the Tax Code of 1997 . . . 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 No. 2-98 shall apply. xxx xxx xxx Corollary thereto, Section 10 of the Rules and Regulations Implementing Article 61 of RANo.8756 provides that alien executives occupying managerial and technical positions employed by 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 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 employed by multinational companies, regardless of whether or not there is an alien executive occupying the same position. However, qualified 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, as amended, pursuant to Article 61 of Executive Order (EO) No. 226, otherwise known as the Omnibus Investments Code of 1987, as amended by Section 5 of RA No. 8756. In BIR Ruling No. 047-01 dated September 28, 2001, which is a deviation from BIR Ruling No. 147-98 dated October 16, 1998, this Office ruled that CDHacE ". . . Filipino employees of the proposed RHQ occupying managerial and technical positions equivalent to alien executives will be subject either to the preferential tax of 15% or to the regular tax rate based on their taxable income in accordance with the tax table under Section 24 (A) (1) (c) of the Tax Code of 1997, regardless of whether there is an alien executive occupying the same position." It is to be noted that in BIR Ruling No. 21-2004 dated September 24, 2004, this Office had the occasion to rule, viz.: ". . . Republic ActNo.8756 (R.A.8756), amending certain portions of Executive Order No.(E.O.226) (otherwise known as the OmnibusInvestmentsCode of1987) defines regional or area headquarters (RHQ) and regional operating headquarters (ROHQ) as follows: 'SEC. 2. Definition of Terms. For purposes of this Act, the term: cEAIHa xxx xxx xxx 2) Regional or Area Headquarters (RHQ) shall mean an office whose purpose is to act as an administrative branch of a multinational company engaged in international trade which principally serves as a supervision, communications and coordination center for its subsidiaries, branches or affiliates in the Asia-Pacific Region and other foreign markets and which does not earn or derive income in the Philippines; and 3) Regional Operating Headquarters (ROHQ) shall mean a foreign business entity which is allowed to derive income in the Philippines by performing qualifying services to its affiliates, subsidiaries or branches in the Philippines, in the Asia Pacific Region and in other foreign markets.' Based on the foregoing, it is clear that as distinguished from an RHQ, which does not earn or derive income in the Philippines, an ROHQ is allowed to derive income in the Philippines by performing qualified services to its affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific Region and in other foreign markets, which income shall be taxed in accordance with Article 64 of E.O.226, as amended by R.A.8756, as follows: 'Art. 64. Corporate Income Tax Incentive to Regional or Area Headquarters and Regional Operating Headquarters. . . . Regional operating headquarters shall be subject to a tax rate of ten percent (10%) of their taxable income as provided for under the National Internal Revenue Code, as amended by Republic Act No. 8424: Provided, That any income derived from Philippine sources by the ROHQ when remitted to the parent company shall be subject to the tax on branch profit remittances as provided for in Section 28 (A) (5) of the National Internal Revenue Code. ' xxx xxx xxx Likewise, pursuant to Article 65 of E.O.226, as amended by R.A.8756, 'Regional operating headquarters shall be subject to the ten percent (10%) value-added tax as provided for under the National Internal Revenue Code, as amended.' ASEcHI In sum, an ROHQ may be subject to the following taxes: 1. ten percent (10%) income tax based on taxable income; 2. fifteen percent (15%) BPRT under Section 28(a)(5) of the Tax Code of 1997 on income of the ROHQ derived from Philippine sources, when remitted to the parent company; and 3. ten percent (10%) value-added tax. The ten percent (10%) tax on ROHQ shall be based on taxable income from its qualifying services to its affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific Region and in other foreign markets, said taxable income shall consists in '. . . the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any authorized for such types of income by this Code or other special laws.' (Section 31, Tax Code of 1997) Further, a BPRT at the rate of fifteen percent (15%) may be imposed when the taxable income is remitted to the parent company." In view of the foregoing, since Lawson is in all fours similarly situated as that of the above-mentioned cases, this Office holds that its Filipino employees who are occupying managerial and technical positions equivalent to alien executives shall be subject to either the preferential tax rate of 15% of their gross income or to the regular tax rate based on their taxable income, regardless of whether there is an alien executive, director or manager occupying the position similar to that of the Filipino employee. Lawson is likewise subject to the 10% tax on taxable income from its qualifying services to its affiliates and subsidiaries within the Asia Pacific region and other countries and to the twelve percent (12%) VAT pursuant to Article 65 of EO No. 226, as amended by RA 8756. (VAT Ruling No. 035-2001 dated June 13, 2001) Furthermore, a 15% BPRT under Section 28 (A) (5) of the 1997 Tax Code shall also be imposed on the profits remitted by Lawson to its parent company on any income derived from Philippine sources. 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. cTSHaE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner (Legal Service)