Punongbayan & Araullo

May 19, 2008 BIR RULING [DA-301-08] DA061-04 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty. Fulvio D. Dawilan Tax Partner Gentlemen : This refers to your letter dated February 28, 2008 stating that your client, Branders.Com (ROHQ) Inc. (the ROHQ), is a company organized and existing under the laws of the Philippines with business address at the 17th Floor, Union Bank Plaza, Meralco Avenue, Cor. Onyx Road, Ortigas Center, Pasig City; that on the other hand, Branders.Com, Inc. (Branders USA) is 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, the ROHQ with SEC Registration No. FS200605663 dated 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; that in order to carry out these operations, the ROHQ employed Filipino personnel to occupy managerial and technical positions. These positions and the respective responsibilities are: A. Direct Finance and Financial Planning and Analysis Manager Oversees, directs and manages the areas of Accounts Receivable, Accounts Payable, and Financial Planning Sections; Monitors, assesses and improves team performance and efficiency in the Direct Finance and Financial Planning Department; Prioritize and lead Finance Projects for process enhancements and staff productivity increase; Interpret the Financial Statement Performance of the Company in comparison to goals and targets; Oversees staff's technical and skills training and development; DEHaAS Responsible for ensuring proper monitoring and planning of the company's cash flows; Participates in planning and formulating long-term business plans; Coaches and manages Section Team leads' career plan and development; and Responsible for providing Sales Department highly efficient Direct Finance Support Activities. B. Marketing Manager In charge of the entire Marketing Department; Responsible for maximizing the profitable acquisition of New Customers; Responsible for the New Brand Development team; Manages and supervises the performance of SEO specialists, Web designers and developers, Copywriters and Analysis; In charge of meeting departmental goals of productivity and costs; Responsible for initiating strategic marketing projects; and Relates Marketing Initiatives to other departments. C. Director of Order Processing The Director of Order Processing is a position directly reporting to the Vice President of Finance. The Director of Order Processing will be mainly responsible in the overall productivity, efficiency, accuracy, motivation and management of the Order Management, Closers, Graphic Arts, Sample Desk, and Customer resolution departments. His key responsibilities are: Improves the productivity of the teams; Improves Company's processing error rates; Hires, fires, coaches and recommends for advancement; Wires and conduct periodic employee performance reviews for team leads; Ensures vendor compliance with agreed-upon service levels; Coordinates/resolves issues as they arrive with other leaders and departments; Recommends any charge to a business process that would increase customer satisfaction or reduce costs; Prepares and presents reports to the staff meeting regarding any/all of the above from time to time; Develops the knowledge and demonstrates the ability to manage additional roles in the future; Management of team composed of more than 60 staff with seven (7) team leaders/supervisors; Tracking of teams' productivity; Reporting of the teams' productivity on a monthly basis; Responsible for recommending order process charges and adjustments as needed; and Other duties as required by the Director. CASaEc D. Software Engineer Branders.com is in the business of eCommerce. Its business model is directly tied to the capabilities of its software solution such as: workflow/order management model, stability, richness or functional depth & breath, finance, lead management, performance and user experience. Similar to all other eCommerce firms, Branders.com does not have physical inventory. The Software Solution is practically the product itself. Business operation & continuity are coupled with the availability of the website. Effectively, the Software Solution has to be dynamically reinvented to maintain market leadership and match the challenges offered by competitors. The Software Solution guarantees operational effectiveness for stimulating workflow model efficiency, data growth management and technical/architecture management for availability, performance and data/workflow management. Effective management of the Software Solution for continued infusion of new technologies requires highly skilled and talented technical resources ( i.e. Software Engineers) to perform and execute the enumerated capabilities below: Maintain Cost Effectiveness through: Continuously helping shape cost effective work models; Collaborating with the Business to develop cost effective solutions; Developing methodologies to maximize resources; and Defining and developing the roadmap for productivity tools. Develop strategies to maintain Market Position and support Business Growth through: Developing strategies/methodologies to maintain Market Position; Enable the business to observe and act expeditiously on market trends; IDCHTE Developing the mechanisms to exploit information and help create new market avenues to grow the business; and Working with the business to recognize increased competitive product/service offerings-marketing campaigns and customer attraction strategies. Exploit Strategies Technologies through: Continuously progressing the technology base to support Business Growth; Infusing New Technologies that allow for rapid Capability Development; Employing a Technology roadmap that is consistent with IT industry progress; Progressing proprietary solution to utilize open source technology; and Continuously expanding technology expertise to support the business in: aDCIHE o Blue Martini Rules Engine o Jave Frameworks Java Sever Faces Spring Transaction Management Model View Controller o Oracle o Operating Systems (Unix Flavors-Sun and Linux and Microsoft) o Application Serves (iPlanet and Weblogic) o Development environment o Testing Tools Mercury suite Open Source Regression Software Software Performance Develop Run the Business methodologies (Business Continuity) through: HDTSCc Developing methodologies to support the existing solution/technologies Developing mechanisms to recognize Solution improvement areas Developing mechanisms to rebuild the Knowledge Capital Consistently keep the Website up Enhancing and expanding Software Configuration Management Continuously developing education materials for the Business New Capability Development through: Managing requirements Managing Solution Features and Capabilities Expanding Solutions Architecture Developing/Expanding Technical Architecture Streamlining Workflow Management Managing Transaction Life Cycle Based on the foregoing representations, you now request confirmation of your opinion that the positions of the ROHQ personnel enumerated above require technical proficiency and initiatives 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 occupying such technical and managerial positions. In reply thereto, please be informed that Section 25 (C) of the Tax Code of 1997, reads: "(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 relation therewith, Article 61 of R.A. No. 8756 provides "Art. 61. Withholding Tax of 15% on Compensation Income. Aliens 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, remuneration and emoluments to a tax equal to fifteen percent (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: Provided, That said Filipinos shall have the option to be taxed at either 15% of gross income or at the regular rate tax on their taxable income in accordance with the National Internal Revenue Code." SDHAEC 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. 8 75 6 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 stressing the above-cited provisions, this Office elucidated the matter in BIR Ruling No. DA061-04 dated February 12, 2004, as follows: ". . . since the positions of the CSPHL-ROHQ personnel enumerated above clearly require technical proficiency and initiative from the individuals occupying such position, hence, 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. (BIR Ruling No. 118-2003 dated April 14, 2003)" IN VIEW OF THE FOREGOING, this Office hereby confirms your opinion that the positions of the ROHQ personnel enumerated above clearly require technical proficiency and initiative from the individuals occupying such position, consequently, such employees shall be subject to the preferential tax rate of 15% or, at their option to the regular tax rate based on their taxable income, regardless of whether there is an alien similarly occupying such technical or managerial position. 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