Baniqued & Baniqued

July 27, 2007 BIR RULING [DA-414-07] DA 302-06 Baniqued & Baniqued Suite 803, 8/F Jollibee Centre San Miguel Avenue Pasig City Attention: Atty. Carlos G. Baniqued Atty. Laura Victoria A.S. Yuson-Layug Atty. Kathleen L. Saga Gentlemen : This refers to your letter dated June 7, 2007 stating that your client, Chevron Malampaya LLC Philippine Branch (CMLLC), is a foreign corporation organized and existing under the laws of the State of Delaware, USA; that it is registered to do business in the Philippines through its branch office located at 8th Floor, Asian Star Building, Asean Drive, Filinvest Corporate City, Alabang, Muntinlupa; that CMLLC is a petroleum service contractor of the Philippine Government pursuant to Presidential Decree No. 87, as amended, otherwise known as "The Oil Exploration and Development Act of 1972", under Service Contract No. 38; that together with its co-venturers, it is engaged in the exploration, development and utilization of petroleum in the Camago-Malampaya field located in offshore Northwest Palawan; that to carry-out its functions as a petroleum service contractor, CMLLC utilizes personnel, both Filipino and foreign; that these employees were hired, are supervised, and report directly to CMLLC management; that the employees report for work at CMLLC's office daily and are subject to annual performance evaluations by CMLLC; that due to the lean organization of CMLLC, the salaries and benefits of the Filipino employees working for CMLLC are administered by CMLLC's domestic affiliate, Chevron Philippines, Inc. (CPI), formerly Caltex Philippines, Inc; that CPI issues the paychecks, withholds the taxes, files in its name the withholding tax returns, and remits to the Government the withholding taxes for the Filipino employees working for CMLLC; that CMLLC then assumes all employee costs advanced by CPI and, consequently, CPI does not claim the salaries of the Filipino employees working for CMLLC as an operating expense; that among the employees working for CMLLC are the Commercial Manager, Finance and Planning Manager, Technical Operations Manager, Legal Manager and Financial Analysis Officer; that the Commercial Manager, Finance and Planning Manager, Technical Operations Manager and Legal Manager are equal in rank; that the Financial Analysis Officer reports to the Finance and Planning Manager; that the positions of Commercial Manager and Finance and Planning Manager are presently occupied by foreigners while the positions of Technical Operations Manager and Legal Manager are occupied by Filipinos; that the functions of the Financial Analysis Officer were previously performed by the Finance and Planning Manager for over a year until the position was created and assumed by a Filipino; that the foregoing Filipino employees have, among others, the following functions: Technical Operations Manager Management and protection of CMLLC's existing contracts; negotiation with partners and clients proposals related to the operation of the CMLLC project; and identification and pursuit of gas and power business opportunities for CMLLC. Legal Manager Legal representation for CMLLC; support for resolution of legal issues; and management of any litigation to which CMLLC is a party. Financial Analysis Officer Understanding the complex fiscal terms attendant to the production sharing contract governing the Malampaya field and the impact arising from new commercial terms; ensuring the economic models correctly mirror these terms; preparation of long-range projections of earnings, cash flow, capital expenditures, operating expenses and other key operating and financial statistics using financial models; analyzing performance of key financial metrics against business plan and preparation of explanations of significant variances on a monthly basis; provision of decision analysis support to Commercial Manager with economic evaluation on major capital projects, new business opportunities, and major initiatives impacting the service contract; and development of economic and fiscal models as required. ASICDH that owing to the complexities of the petroleum industry and the role of CMLLC as a petroleum service contractor, the foregoing Filipino employees are required to have technical proficiency and specialized knowledge and experience in the performance of their functions. Based on the foregoing representations, you now request confirmation of your opinion that the Filipino employees working for CMLLC, specifically the Technical Operations Manager, the Legal Manager and the Financial Analysis Officer, who are occupying managerial and/or technical functions and occupying the same level positions as CMLLC's alien employees, are subject to 15% income tax from the date of their employment pursuant to Section 25 (E) of the Tax Code of 1997, as implemented by Section 2 (F) of Revenue Regulations No. 6-2001. In reply thereto, please be informed that Section 25 (E) of the Tax Code of 1997, reads: "(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor . An alien individual who is a permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, received from such contractor or subcontractor: Provided, however, That the same tax treatment shall apply to a Filipino employed and occupying the same position as an alien employed by petroleum service contractor and subcontractor. Any income earned from all other sources within the Philippines by the alien employees referred to under Subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax, as the case may be, imposed under this Code." 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. 8756 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 position 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. ATDHSC IN LIGHT OF ALL FOREGOING, this Office holds that since the Filipino employees working for CMLLC, specifically the Technical Operations Manager, the Legal Manager and the Financial Analysis Officer, fall within the condition set by Revenue Regulations No. 6-2001, as amended by Revenue Regulations No. 12-2001, inasmuch as these employees are required to have technical proficiency and initiatives as well as specialized knowledge and experience in the performance of their functions, the same tax treatment is applicable to Filipinos employed and occupying the same positions as to those aliens employed by CMLLC. Accordingly, the Filipino employees working for CMLLC 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. 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