BIR Ruling [DA-302-06]

May 9, 2006 BIR RULING [DA-302-06] 25 (c); DA 61-04 Puyat Jacinto & Santos 12 F/ Manilabank Building 6772 Ayala Avenue Makati City Attention: Atty. Virginia B. Viray and Atty. Lai-Lynn Angelica B. Barcenas Gentlemen : This refers to your letter dated June 17, 2005 stating that your client, HENKEL ASIA-PACIFIC LIMITED (HENKEL), is a multinational company organized and existing under the laws of HongKong with a Regional Operating Headquarters in the Philippines registered with the Securities and Exchange Commission (SEC) under SEC Registration No. A200300073; that HENKEL is doing business under the name Henkel Financial Services SEA Co. Ltd.; that as stated in its Certificate of Registration and License, the regional operating headquarters shall engage in the following general functions: 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; 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. specifically, the principal activity of HENKEL is to provide corporate support services to Henkel Group affiliates in the Asia-Pacific region; that the services performed cover: a) technology application; b) marketing; c) human resources; d) finance and information systems infrastructure through central coordination; and e) all-round support and reinforcement of the management of the Henkel Group companies and its partner companies in the region. ATaDHC that in order to carry out these functions, HENKEL has engaged the services of certain Filipinos and foreigners to occupy the following managerial and technical positions in the regional operating headquarters: A. Accounting Managers/Department Heads 1. Specific Functions Accounting Managers/Department Heads perform the following functions : a. Determines when to initiate projects and leading his/her department to their successful completion; b. Organizes and manages his or her department, including but not limited to: Organizing and delegating work within the resources allocated to the accounting team he or she is leading; Recommending and supporting staffing requirements of the accounting team under his or her supervision; Identifying potential deputy team leads among processors; Explaining processes to users and user groups with a view to giving them a better understanding of the processes employed by Henkel; Preparing detailed process documentation for the General Manager to vet before publication of procedures and policies on the Henkel web site for the benefit of customers; Formulating, maintaining and documenting detailed duties and responsibilities of the persons in the team; Developing and maintaining systems and procedures within the unit that cover all possible accounting and processes events of customers; Improving systems and procedures and adjusting documentation when necessary; Ensuring the maintenance of schedules and tables (cause the rendering of overtime when necessary) Delegating the necessary tasks to department members. c. Liaises with User groups including but not limited to: accounting counter parts at the business unit (customer); SAP functional and technical consultants; Sources of information inputs (e.g. Project Managers, Mailroom, salesmen); Other team leads; The General Manager of Henkel. d. Identifies and fills gaps in communication and procedure within his or her team when necessary. Procedurally resolve the recurrence of such gaps; e. Leads the effort to roll out Henkel services to customers; f. Takes the lead in the processing of transactions himself or herself when, if and as often as it is necessary; 2. Job Competence Accounting Managers/Department Heads demonstrates knowledge, understanding and proficiency in the following: a. SAP Processing; b. Business Accounting Transactions; c. Computer proficiency; d. Process mapping and flow charting; e. Communication skills written (English); f. Communication skills spoken(English and Filipino); g. Communication skills facilitation and some persuasion; h. Should be able to handles customer complaints, queries and general inquiries diplomatically; EAcCHI i. General knowledge of other Henkel Team roles and processes; j. Knowledge of Henkel accounting processes in the country and module of his or her team assignment; k. Knowledge of Henkel Corporate Accounting Standards; l. Ability to work well with the Deputy Department Head and the Department Team Members; m. Problem solving skills including but not limited to those involving people and customer issues; n. Special conditions; o. Should be able to relate to different cultures and travel internationally; p. Should be able to assert herself in an international setting B. Senior Accountants/Deputy Department Heads 1. Specific Functions Senior Accountants/Deputy Department Heads perform the following functions: a. Assists and supports the Department Head in the management of the department; b. Takes over the duties and responsibilities of the Department Head in his or her absence; c. Documents team meetings in the prescribed format; d. Follows up action items by the Department Head to other department members; e. Performs regular transaction processing activities of the team when necessary; f. Receives instructions from the department head in the processing of transactions; g. Goes about procedures in the manner prescribed by the documentation and/or department head; h. Liaises with User groups as the transactional level, including, but not limited to: Accounting counterparts at the business unit (customer); SAP functional and technical consultants; Sources of information inputs (e.g. Project Managers, mailroom, salesmen); Department heads, deputy department heads and the general manager of the regional operating headquarters. i. Performs regular document processing activities of the team when necessary; j. Complies key business statistics as needed; k. Performs management analysis of skill requirements. Management know how includes: knowledge of Henkel processes applied for each country; Able to work well with the department head and the department team members. 2. Job Competence Senior Accountants/Deputy Department Heads demonstrates knowledge, understanding and proficiency in the following: a. Document processing methods and procedures, including but not limited to: "Pulling" Document images from servers and/or workstations in other countries set up for this purpose; Parsing or splitting these document images using the currently used Abode Acrobat or other comparable software used by Henkel; Posting reports of documents received and documents processed in the proper format and in a timely manner (i.e. not more than 24 hours after documents. have been received and/or processed) on the designated lotus notes database; Liaison with the relevant country accounting departments regarding the status of documents received and/or processed; Extracting from and exploring in the SAP environment, the necessary data to ascertain the documents processed; Identifying the completion and sufficiency for booking of all documents for processing, for all countries as regards to clarity and completeness; b. General booking Logic applied to source documents; EScAID c. Compile, collate and present key performance indicators used by Henkel d. Be able to communicate and explain update on his or her work to the satisfaction of co-workers and superiors; e. Technical know how: SAP processing; Business Accounting Transactions; Computer proficiency; Communication skills spoken (English and Filipino); Communication skills facilitation and some persuasion; should be able to handle customer complaints, queries and general inquiries diplomatically; Knowledge of Henkel accounting processes in the country and module of his or her team assignment; Should be able to work well with the Department Head and the Department Team members; Problem Solving Skills; Should be able to relate to different cultures and travel internationally; Should be able to assert himself or herself in an international setting; Should have the initiative to identify and recommend necessary projects. C. Document Manager and Foreign Language Speaker/Deputy Department Head Specific functions and job competence are the same as that of a Deputy Department Head, except that in addition to English and Filipino, he or she should be able to communicate in Korean, Thai, Chinese Mandarin, Japanese, German, French and other European languages. D. Accountant/Department Member 1. Specific Functions Accountants/Department Members perform the following functions: a. Receive instructions from the department head and deputy department head in the processing of transactions; b. Go about procedures in the manner prescribed by the documentation and/or the department head or deputy department head; c. Liaise with User groups at the transactional level including but not limited to: Accounting counter parts at the business unit (customer); SAP Functional and technical consultants; Sources of information inputs (e.g. Project Managers, mailroom, salesmen); Department heads, Deputy department heads and the General Manager of the regional operating headquarters. 2. Job Competence Accountants/Department Members demonstrate knowledge, understanding and proficiency in the following: a. Document processing methods and procedures, including but not limited to: "Pulling" Document images from servers and/or workstations in other countries set up for this purpose; Parsing or splitting these document images using the currently used Adobe Acrobat or other comparable software used by Henkel; Posting reports of documents received and documents processed in the proper format and in a timely manner (i.e. not more than 24 hours after documents have been received and/or processed) on the designated lotus notes database; CEaDAc Liaison with the relevant country accounting departments regarding the status of documents received and/or processed; Extracting from and exploring in the SAP environment, the necessary data to ascertain the documents processed; Identifying the completion and sufficiency for booking of all documents for processing, for all countries as regards to clarity and completeness; b. Booking Logic applied to source documents, including but not limited to cost and profit centers; c. Routine processes such as closing the books and/or processing certain types of invoice, depending on the specialty assigned to the Department member; d. Be able to communicate and explain update on his or her work in the English language to the satisfaction of co-workers and superiors; e. Technical know how: SAP Processing; Business Accounting Transactions; Computer proficiency; Communication Skills spoken (English and Filipino); Communicate skills facilitation and some persuasion; should be able to handle customer complaints, queries and general inquiries diplomatically; Knowledge of Henkel accounting processes in the country and module of his or her team assignment; f. Minor Problem solving skills E. Foreign Language Speaker/Department Member Specific Functions and Job Competence are the same as that of a Department Member, except that in addition to English and Filipino, he or she should be able to communicate in Korean, Thai, Chinese Mandarin, Japanese, German, French and other European languages. Based on the foregoing representations, you now request confirmation of your opinion that the Filipino and foreign managers and technical personnel of Henkel registered as a regional operating headquarters in the Philippines are entitled to the 15% preferential tax rate provided in Section 25(3)(C) of the Tax Code of 1997 in relation to Republic Act (R.A.) No. 8756. In reply thereto, please be informed that Section 25 of the Tax Code of 1997 provides "Sec. 25(3)(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. For purposes of this Chapter, the term "multinational company" means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets. In relation thereto, 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 tax rate on their taxable income in accordance with the National Internal Revenue Code." cDEHIC Moreover, Section 10 of the Implementing Rules of R.A. No. 8756 provides "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. 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 National Internal Revenue Code, as amended by R.A. No. 8424." In applying the aforesaid laws, this Office in BIR Ruling No. DA061-04 dated February 12, 2004 ruled that "xxx xxx xxx "IN THE LIGHT OF ALL FOREGOING, 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." Considering that the positions occupied by the employees of Henkel enumerated above require technical proficiency in accounting, computer and language, and in the case of the department heads and deputy department heads, the exercise of initiative, they are entitled to the preferential tax rate of 15% pursuant to Article 61 of R.A. No. 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 Commissioner of Internal Revenue