BIR Ruling [DA-265-04]

May 17, 2004 BIR RULING [DA-265-04] Sections 22 (EE), 28 (A) (6) (b) & 57 (B) Alba Romeo Co., CPAs 7/F, Multinational Bancorporation Centre 6805 Ayala Avenue Makati City Attention: Mr. Alba Romeo Gentlemen : This refers to your letter dated March 19, 2004 requesting on behalf of your client, Maitland-Smith Regional Headquarters for a confirmation of your opinion that a regional operating the headquarters (ROHQ) is not a "management and technical consultant" contemplated under Section 2.57.2 of Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 30-2003, hence, income payments made to ROHQ for qualifying services rendered by it as such are not subject to the 10% or 15% creditable withholding tax, as the case may be. It is represented that Maitland-Smith Regional Operating Headquarters (MSROHQ) is multinational company organized and existing under the laws of Vanuatu; that it is licensed to operate a ROHQ in the Philippines pursuant to Executive Order (E.O.) No. 226, otherwise known as the "Omnibus Investments Code of 1987," as amended by Republic Act (R.A.) No. 8756; that as a ROHQ, MSROHQ is permitted to engage only in the following qualifying services for the benefit exclusively of its affiliates, or branches or subsidiaries, viz : (a) General administration and planning, (b) Business planning and coordination; (c) Sourcing procurement of raw materials and components; (d) Corporate finance advisory services; (e) Marketing control and sales promotion; (f) Training and personnel management; (g) Logistics services; (h) Research and development services and product development (i) Technical support and maintenance; (j) Data processing and communication; (k) Business development that MSROHQ renders certain qualifying services enumerated above to its affiliate, the Maitland-Smith Cebu, Inc. (MSCI), a domestic corporation; that in consideration for such services, MSCI reimburses MSROHQ for expenses incurred by the latter in providing the qualifying services plus a certain percentage mark-up on cost; that MSCI withholds 10% on its payments made to MSROHQ resulting to huge excess CWT on the part of MSROHQ amounting to PhP4.524 Million as of February 2004; that MSROHQ is prohibited from offering qualifying services to entities other than its affiliates, branches or subsidiaries, as specified in its registration with the Securities and Exchange Commission (SEC); and that ROHQs cannot participate in any manner in the management of any subsidiary or branch that they may have in the Philippines. In reply, please be informed that pursuant to Section 2.57.2(B) of Revenue Regulations (Rev. Regs.) No. 2-98, as amended, income payments to juridical persons for services rendered as "management and technical consultants" are subject to the ten percent (10%) or fifteen percent (15%) creditable withholding tax, as the case may be. Section 22(EE) of the Tax Code of 1997 qualifies regional operating headquarters as " a branch established in the Philippines by multinational companies which are engaged in any of the following services: general administration and planning; business planning and coordination; sourcing and 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 . Furthermore, Article 58(b)(1) of E.O. No. 226, as amended by R.A. No. 8756, specifically identifies ROHQ as an entity which is permitted to perform only certain qualifying services as enumerated above. It is also prohibited from offering qualifying services to entities other than its affiliates, branches or subsidiaries, as specified in its registration with the SEC. Furthermore, ROHQs cannot participate in any manner in the management of any subsidiary or branch that they may have in the Philippines. On the other hand, "management and technical consultants" normally render services to various unrelated parties. These entities are engaged to supervise, direct and control the management and operation of other companies ( Anscor Container Corp. v. CIR , CA-G.R. SP No. 22912, March 21, 1991; PBP Financing and Leasing Corporation v. CTA , CA-G.R. SP No. 35853, November 26, 1997; Premier Hotels and Resorts Mgt., Inc., v. CIR , CTA Case No. 4978 and 5089, July 23, 1998; and LMG Chemicals Corp. v. CIR , CTA Case No. 5300, Feb. 2, 2000). In these cases, management fees paid by the managed company to the managing company were denominated as income payments made to "management and technical consultants," hence subject to the then 5% (now 10% or 15%) creditable withholding tax. In the light of your representation that MSROHQ is merely a ROHQ as it is permitted by law to perform only certain qualifying services for the benefit of its affiliates, branches and subsidiaries such as those enumerated above, this Office is of the opinion that the imposition of the 10% or 15% creditable withholding tax, as the case may be, will not apply to them. Moreover, the 10% or 15% creditable withholding tax, as the case may be, for services rendered as "management and technical consultants" is deducted and withheld from gross fees or gross payments which in all probability, will exceed the income tax liability of the ROHQ. It is noted that ROHQs are entitled, to a reduced tax rate of 10% based on their net income. On this basis, this Office further opines that the 10% or 15% creditable withholding tax, as the case may be, ordinarily imposed on management and technical consultants, if applied to ROHQs, such as MSROHQ, will result in a situation where the preferential income tax rate granted to them is effectively negated or rendered meaningless. The imposition of the 10% or 15% creditable withholding tax, as the case may be, is patently and grossly disproportionate to the tax due from, or payable by, ROHQs on such income derived from their rendition of certain qualifying services to their affiliates, branches or subsidiaries. Considering the foregoing, your opinion that Maitland-Smith Regional Operating Headquarters, as ROHQ rendering the above enumerated qualifying services exclusively to its affiliates, branches or subsidiaries, is not subject to the 10% creditable withholding tax imposed under Section 2.57(B) of Rev. Regs. No. 2-98, as amended by Rev. Regs. No. 30-2003 is hereby confirmed. Finally, the tax liability of Maitland-Smith Regional Operating Headquarters shall be computed in accordance with Section 28(A)(6)(b) of the Tax Code of 1997. 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