BIR Ruling [DA-450-99]

August 4, 1999 BIR RULING [DA-450-99] Penn Philippines, Inc. FTI Ave., Complex Taguig, Metro Manila Attention: Mr . Carlito Yu Vice President Finance and Administration Gentlemen : This refers to your letter dated April 19, 1999 stating that you are a multi-national corporation engaged in the manufacture of quality elastic fabrics for exports; that your parent company is based in the United Kingdom; that at present, your Asia Pacific manufacturing operations are in Thailand, China, Hong Kong and in the Philippines; that in the Philippines, you have two (2) companies, the Penn Philippine Exports Inc. in the Laguna International Industrial Park (LIIP) which is under the Philippine Economic Zone Authority (PEZA) and Penn Philippines Inc. in the Food Terminal Complex in Taguig, Metro Manila; and that you would like to put up in the Philippines a Regional Operating Headquarters (ROHQ) under the provision of the new Comprehensive Tax Reform Program (CTRP). cdlex That in view of the foregoing, you now request clarification on the following: 1. What are the government requirements which will facilitate the employment of foreigners in the ROHQ? 2. Are local managers assigned both in finance/administration and production i.e. Accounting, Treasury, knitting, warping and dyeing, subject to 15% gross income tax? These managers will be involved in the operation/management of the regional companies particularly the two companies in the Philippines. 3. Per the Securities and Exchange Commission (SEC), the vehicle to register a ROHQ is via a branch office. Is this the intention of the CTRP? In reply, please be informed that Section 25(C) of the Tax Code of 1997 provides, viz: "SEC. 25. Tax on Nonresident Alien Individual . xxx xxx xxx "(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 aliens employed by these multinational companies. 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." Since what you would like to put up in the Philippines is a Regional Operating Headquarters, its expatriate employees are subject to tax at the rate of 15% on their gross compensation income. The term "expatriate employees" however, is classified to refer only to aliens employed in managerial, confidential or highly technical positions. Thus, under Philippine Labor Law, the employment of non-resident aliens is limited only to positions which are managerial or highly technical in nature or where there are no Filipinos who are competent, able and willing to perform the services for which the aliens are desired. However, if Filipinos are employed and are occupying managerial or technical positions as those of aliens employed by the regional headquarters or representative office, they are likewise, subject to the preferential tax rate of 15% on their gross compensation income. Clearly, the rationale for this proviso is to equalize the enjoyment of the preferential tax rate accorded to an alien with a Filipino who is occupying a similar position in the regional headquarters. However, the preferential tax treatment shall apply only in cases where concurrently an alien holds a position similar to that of the Filipino employee. The objective of the law to equalize the tax treatment of an alien and a Filipino is no longer applicable in a situation where there is no alien employed. Furthermore, this preferential tax treatment to Filipinos shall not apply where the counterpart expatriate is recalled to the head office or reassigned elsewhere, whether temporarily or otherwise, and only Filipinos are the ones so employed by a regional headquarter or representative office for the time being. The same answer obtains where the post vacated by the expatriate is subsequently assumed by a Filipino to replace the expatriate and as a result of which all top management posts are now being occupied by Filipinos. (BIR Ruling No. 147-98 dated October 16, 1998) Accordingly, local managers assigned both in finance/administration and production if involved in the operation/management of the regional companies can avail of the preferential tax rate of 15% on their gross compensation income subject to the condition in the preceding paragraph. Thus, this Office hereby holds that in all instances where there is no expatriate present and working in the establishment, there being no disparity to speak of with respect to the tax rate imposed on the income received by the Filipinos, said Filipino employees employed by the Regional Operating Headquarters shall be liable to the normal income tax rates imposed under Section 24(A)(1)(c) of the Tax Code of 1997. This Office is not the proper forum to address questions #1 and #3 of your letter, the same being outside its province. llcd Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)