BIR Ruling [DA-251-03]

August 1, 2003 BIR RULING [DA-251-03] RR 2-98; DA 450-99 SGV & CO. 6760 Ayala Avenue Makati City Attention: Atty. Rafael C. Vinzon Gentlemen : This refers to your letter dated May 5, 2003 requesting confirmation of your opinion that the compensation and benefits to be paid to directors and managers employed by Cypress Semiconductor Philippine Headquarters Ltd. (CSPHL-ROHQ) are subject to the 15% preferential tax rate prescribed in Section 25(C) of the Tax Code of 1997 in relation to Republic Act Nos. 8756. It is represented that Cypress Semiconductor Philippine Headquarters Ltd. (CSPHL) is a multinational company organized and existing under the laws of Cayman Island; that CSPHL is granted a license to establish a Regional Operating Headquarters (ROHQ) in the Philippines under Securities and Exchange Commission (SEC) Reg. No. A200114939 dated October 3, 2001; that as provided in the said license, 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 Cypress Manufacturing Ltd. Philippine Branch (CML), an affiliate of CSPHL-ROHQ, is registered with the Philippine Economic Zone Authority (PEZA) as a manufacturer of semiconductor products that support key communication applications in network infrastructure and access equipment; that CML currently employs the directors and managers who will be transferred to CSPHL-ROHQ; that these directors and managers will generally perform the following functions: (1) They have the capacity and authority to make major plans and policies, implement and enforce the same; (2) They formulate major decisions that affect matters such as finance, marketing, research, operations, product development and similar high level activities; (3) They effectively recommend measures in matters of policy determination and execution; (4) They are primarily tasked to head and manage specific departments in the organization; and (5) They are responsible in establishing operational objectives and assignments. that given the technical requirements of the position, the directors and managers are required to have extensive experience in the semiconductor assembly operations; that CSPHL-ROHQ will employ these directors and managers to service the needs of CML and affiliates abroad as it relates to the latter's various activities such as: (a) worldwide semiconductor assembly test/operations; (b) worldwide subcontracting activity; (c) development of new products and product engineering; (d) regional quality assurance; and (e) regional logistics and engineering information system; and that it is a requirement for such personnel to have extensive knowledge and experience in the semiconductor assembly operations. In reply thereto, please be informed that Section 10 of the Implementing Rules and Regulations of Republic Act No. 8756 specifically provides that: "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." The above discussion shows that the directors and managers are responsible for the management of their particular departments, and that the work they do is not merely routinary or clerical but requires the exercise of discretion and judgment within their respective departments. Secondly, owing to the technical nature of the semiconductor industry, such directors and managers are required to have extensive knowledge and experience in the semiconductor assembly operations. Thus, this Office has already occasion to rule that local managers who are assigned both in finance/administration and production, if involved in the operation/management of the regional companies are subject to tax at the rate of 15% on their gross compensation income. ( BIR Ruling No. DA-450-08-04-99, August 4, 1999 ). The tax rate of 15% shall apply regardless of whether or not there is an alien executive occupying the same position. ( 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 ) CEIHcT SUCH BEING THE CASE, this Office confirms your opinion that the directors and managers to be employed by CSPHL-ROHQ are deemed to occupy managerial and technical positions entitled to 15% preferential tax rate on their compensation and benefits as prescribed in Section 25(C) of the Tax Code of 1997 in relation to Republic Act Nos. 8756. 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