BIR Ruling [DA-521-05]

December 23, 2005 BIR RULING [DA-521-05] ROHQ 040-01; 265-04 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Ma. Victoria A. Villaluz Partner, Tax Services Gentlemen : This refers to your letter dated August 9, 2005 requesting on behalf of your client, Astec Custom Power Philippines, Inc . ("Astec-Pasig") confirmation of your opinion that the Service Fees paid by Astec-Pasig to Astec International Limited ROHQ ("Astec-ROHQ") pursuant to their Service Agreement executed on October 1, 2001 are not subject to the creditable withholding tax (CWT) of 10% or 15% nor to the final withholding tax of 32% on payments to nonresident foreign corporations. It is represented that Astec-Pasig is a domestic corporation organized and existing under Philippine laws which has been registered as a pioneer enterprise with the Board of Investments under Executive Order (EO) No. 226; that it is engaged in the research, design and development of switch mode power supply products; that Astec-ROHQ is a duly licensed regional operating headquarters or ROHQ of a multinational corporation organized and existing under the laws of Hongkong; that Astec-Pasig and Astec-ROHQ are affiliated companies, they being owned by the same parent company; that on October 1, 2001, Astec-Pasig and Astec-ROHQ entered into a Service Agreement whereby Astec-Pasig agreed to pay a fixed monthly Service Fee to Astec-ROHQ in consideration of certain qualifying services or activities permitted and authorized to be rendered by an ROHQ pursuant to Article 59(b)(1) of EO No. 226, as amended by Republic Act (RA) No. 8756 and Section 22 (EE) of the Tax Code of 1997, viz : (a) General administration and planning; (b) Business planning and coordination; (c) Sourcing procurement of raw materials and components; (d) Corporate finance advisory services; (e) Marketing control and sales promotion; (f) Training and personnel management; (g) Logistics services; (h) Research and development services and product development; (i) Technical support and maintenance; (j) Data processing and communication; and (k) Business development. LLphil In reply, please be informed that in BIR Ruling No. 040-01 dated September 18, 2001, this Office had the occasion to rule that if an ROHQ provides qualifying services to its affiliate, the income payments made by the affiliate to the ROHQ are not subject to the 5% (now 10% or 15%) CWT imposed on management and technical consultants. Likewise, in BIR Ruling No. DA-265-04 dated May 17, 2004, this Office ruled that the 10% or 15% CWT on gross income payments to ROHQs is incompatible with Section 28(A)(6)(b) of the Tax Code, imposing only a 10% tax on the net income of ROHQs. From the foregoing and inasmuch as Astec-ROHQ provides qualifying services exclusively to its affiliate, Astec-Pasig, this Office is of the opinion that the income payments made by Astec-Pasig to Astec-ROHQ are not subject to the 10% or 15% CWT. Likewise, since Astec-ROHQ qualifies as an ROHQ under Article 59(b)(1) of EO No. 226, as amended by RA No. 8756 and Section 22 (EE) of the Tax Code of 1997, its net taxable income, therefore, is subject to the 10% tax imposed under Section 28(A)(6)(b) of the 1997 Tax Code, as amended, and not to the 32% income tax imposed on a nonresident foreign corporation under Section 28(B)(1) of the same Code. Consequently, the said payments shall not be subject also to the final withholding tax imposed under Revenue Regulations No. 2-98, as amended, implementing Section 57(A) of the 1997 Tax Code. 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