Asul Law Offices

July 17, 2007 BIR RULING [DA-389-07] Section 25 (C); DA-246-2002 dtd. 12/18/02 Asul Law Offices 5th Floor COCOFED Building 144 Amorsolo St., Legaspi Village Makati City Attention: Maria Teresa S. Ubano Counsel Gentlemen : This refers to your letter dated April 20, 2006, in behalf of your client, Naxos Global Distribution Limited (Naxos-Mother Company, for short) requesting a confirmation of your opinion that: a) the taxable income of Naxos ROHQ is subject to preferential income tax rate of 10%; b) the income payments to the expatriate hired by Naxos-ROHQ is subject to 15% of the gross income while the Filipinos of equal rank as of the expatriate have the option to either avail of the preferential tax rate of 15% based on gross income or to the graduated tax rate of 5%-32% in accordance with Section 24 of the Tax Code of 1997. It is represented that Naxos-Mother Company, is a multinational corporation duly organized and existing under the laws of Hongkong SAR; that it is engaged in the business of music distribution and sales and international trade with its branches, affiliates and subsidiaries in the Asia Pacific Region and other foreign markets; that Naxos-Mother Company and all its affiliates, subsidiaries and branches (Naxos Companies) are not engaged in trade and/or business in the Philippines; that the Board of Directors of Naxos-Mother Company resolved to establish a regional operating headquarters in the Philippines to perform services pursuant to its BOI and SEC registrations; that Naxos-ROHQ shall render the data processing and content work services through the importation of contents in compact disks (CD's) which will be sent by Naxos-Companies to the Philippines for processing and subsequently, Naxos-ROHQ will re-export the processed CD's to Naxos-Mother Company in Hongkong; that the importation of CD's will fall under conditional free importation pursuant to Section 105 of the Tariff and Customs Code of the Philippines; that on the other hand, the output of the other services rendered by Naxos-ROHQ to Naxos Companies (customer, design work, accounting and administrative, and technical services) shall be transmitted to Naxos Companies through the internet; that Naxos-ROHQ will bill Naxos Companies for the qualifying services rendered in US dollars based on the cost of services plus a pre-determined mark-up; that Naxos Companies will pay the said billings in US dollars; that Naxos-ROHQ shall employ senior officers to occupy managerial and highly technical positions who would be an expatriate with special non-immigrant visa for Vice-President Information Technology and Filipino citizens for other vice-president positions. (Graphic Design/User Interface, Content Manager, Finance, Project Management/Business Analysis and Customer Service) TAIDHa In reply, please be informed as follows: 1. Section 28 (A) (6) (b) of the Tax Code of 1997 provides, to quote: "Sec. 28. Rates of Income Tax on Foreign Corporation . "A) Tax on Resident Foreign Corporation. . . . "(6) Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies "xxx xxx xxx "(b) Regional Operating Headquarters as defined in Section 22(EE) shall pay a tax of ten percent (10%) of their taxable income. " Accordingly, the taxable income of Naxos-ROHQ is subject to preferential income tax rate of 10%. 2. Section 2.57.1 (D) of Revenue Regulations No. 2-98, A as amended by Revenue Regulations No. 6-2001, and as further amended by Revenue Regulations No. 12-2001, now reads: SIcEHD "(D) Income Derived by Alien Individuals Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. "The same tax treatment is applicable to Filipinos employed and occupying the same positions as those 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 tax rate on their taxable income in accordance with the Tax Code of 1997. In case of the latter, the withholding rates under Sections 2.78 and 2.79 of Revenue Regulations No. 2-98 shall apply. xxx xxx xxx." Based on the foregoing, the income payments to expatriates would thus be subject to the preferential rate of 15% of gross income, pursuant to Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001 and 12-2001. On the other hand, Filipinos have the option to be taxed at either 15% of their gross income or the graduated tax rates of 5%-32% in accordance with Section 24 of the Tax Code of 1997. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, if 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