Z. L. Padro, Jr. & Associates

October 4, 2007 BIR RULING [DA-524-07] Section 25 (C); DA-141-2006 dtd. 3/17/07 Z. L. Padro, Jr. & Associates 119 Ortigas Ave., Bo. Ugong Pasig City Attention: Zosimo L. Padro, Jr. Counsel Gentlemen : This refers to your letter dated March 14, 2007, requesting on behalf of your client, JOEL P. CAYACAP, a confirmatory ruling that the position he holds in PANDUIT ASIA PACIFIC Pte., Ltd. Philippines Representative Office qualifies as managerial position and therefore is entitled to the 15% preferential tax rate under Section 25 (C) of the Tax Code of 1997 and Section 61 of Republic Act (RA) No. 8756, regardless of whether or not there is an alien executive occupying the same position. CIAcSa It is represented that JOEY P. CAYACAP is a Filipino employee of PANDUIT ASIA PACIFIC Pte., Ltd. Philippines Representative Office (Panduit Phils., for short) with office address at TCNI Business Center, 1903B West Tower, PSEC Bldg., Ortigas Center, Pasig City; that PANDUIT ASIA PACIFIC PTE., LTD. is a multinational company incorporated in Singapore with registered office address at 60 Tuas Ave. 11, Singapore, 639106; that it is a privately owned company since 1955, and is one of the leading world-class manufacturers and producers of innovative electrical and networking solutions and services; that its headquarter has manufacturing plants also in Costa Rica, China and Singapore; that in Asia, PANDUIT'S headquarter is located at Singapore catering to the entire region including the Philippines, Japan, Malaysia, Indonesia, Thailand, Australia, Vietnam, Brunei, China, India and Hongkong; that PANDUIT Phils. provides support in terms of marketing and promotion to local distributors; that in September, 2001, JOEL P. CAYACAP was employed at Panduit Philippines as its Assistant Sales Manager Datacom; that in July, 2005, he was designated as Assistant Manager at the Representative Office up to the present with his latest salary increased to P80,733.00 per month; that ever since his employment at the Panduit-Phils., he had always been paying the regular tax rate of 34% as provided for under Section 24 (A) of the Tax Code of 1997; and that it is your opinion that his salaries and other income shall be taxed at the rate of 15% pursuant to Section 25 (C) of the Tax Code of 1997. acAIES In reply thereto, please be informed that Section 25 (C) of the Tax Code of 1997, provides: "Section 25. Tax on Non-Resident 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 or regional operating headquarters, a tax equal to 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 ." (Emphasis ours) Corollary thereto, Section 25 (C) of the 1997 Tax Code also states that the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by an ROHQ. The rationale for the same treatment is to equalize the enjoyment of the preferential tax rate accorded to an alien with a Filipino who is occupying a similar position in an ROHQ. aCIHAD In this regard, Article 61, of Executive Order No. 226 (Omnibus Investment Code of 1987), as amended by R.A. No. 8756 clarifies the tax treatment of the income of Filipinos employed by an ROHQ and occupying the same positions as aliens, to wit: "Article 61. Withholding Tax of 15% on Compensation Income . Aliens employed by the regional or area headquarters or regional operating headquarters 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 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 the National Internal Revenue Code, as amended by Republic Act No. 8424 ." In relation thereto, Section 10 of the Rules and Regulations Implementing Article 61 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. HITEaS 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 RA 8424." Based on the above quoted provisions, Mr. JOEL P. CAYACAP, occupying a managerial position, shall have the option to be taxed at either the preferential tax rate of 15%, or the regular tax rate based on his taxable income, regardless of whether there is an alien occupying the position similar to that of the Filipino employee. DTAHSI Under Article 212 of The Labor Code of the Philippines, as amended, "managerial employee", refers to one who is vested with powers or prerogatives to lay down and execute management policies and/or hire, transfer, suspend, lay off, recall, discharge, assign or discipline employees. On the other hand, "technical position" has been described as a position which clearly requires technical proficiency and initiative from the individuals occupying such position (BIR Ruling DA-061-04 dated February 12, 2004) . This Office, in a long line of rulings, has applied the foregoing principles and ruled that Filipino employees occupying managerial and/or technical positions may avail of the 15% preferential tax rate. Thus, in BIR Ruling No. 147-98 dated October 16, 1998 , this Office concurred with the representation that managerial or technical positions belong to the category of positions known as "top management" and are attached to executive functions, subject to the control and supervision of higher authorities, making major plans and policies, to formulate major decisions affecting such matters as finance, treasury, marketing, research, operations, product development, external relations and similar high level activities. The top positions go by such names as "general manager", "branch manager", "country head", "senior country officer", "country manager", "OBU manager", "chief executive officer" and their deputies, who are one rank below in the line of organizational chart which are known as "Head of _____" pertaining to the different major departments, such as credit, operations, correspondent banking, private banking, treasury, financial institutions, financial management, finance, marketing, human resources, corporate finance, compliance and audit, special projects, correspondent banking, or as Deputy/Assistant Manager for _____; and their ranks are usually Vice President and above. TSIEAD Also, in BIR Ruling DA-555-98 dated December 4, 1998 , this Office ruled that Filipino citizens occupying the coordinator positions such as Revenue Coordinator; Reporting Coordinator; Disbursement Coordinator; SSC Coordinator and Human Relations Coordinators can avail of the 15% preferential tax rate. Specifically for a General Manager, this Office has issued two rulings. In BIR Ruling No. DA-260-99 dated April 29, 1999 , this Office ruled that the General Manager of JC Penny Purchasing Corporation is subject to the preferential tax rate of 15% on his gross income. The same ruling was held in BIR Ruling DA-032-02 dated March 7, 2002 where the General Manager who is responsible for the overall efficiency of the operation, develops corporate policies, implements decisions, instructions and policies of the Board of Directors of the head office, controls the day to day management and reports directly to the Board of Directors, was held to be subject to the preferential tax rate of 15%. TCAHES For local managers assigned to both finance/administration and production (i.e. accounting, treasury, knitting, warping and dyeing) who are involved in the operation/management, in BIR Ruling DA-450-99 dated August 4, 1999 , this Office considered them as qualified to avail of the preferential tax rate of 15%. In a recent ruling, Filipino personnel were employed to occupy the following positions: (1) Tax Analyst; (2) Credit Analyst; (3) Financial Analyst (Corporate Finance); (4) Product Line Financial Analyst; (5) Fixed Assets Supervisor; (6) Senior Accountant; (7) Senior Buyer. This Office ruled that since the positions clearly require technical proficiency and initiative from the individuals occupying such positions, such employees shall be subject to either preferential tax rate of 15% or to the regular tax rate. (BIR Ruling No. DA-061-04 dated February 12, 2004) TIaCAc Finally, in BIR Ruling No. 047-01 dated September 28, 2001 , this Office ruled ". . . Such being the case, Filipino employees of the proposed RHQ occupying managerial and technical positions equivalent to alien executives will be subject either to the preferential tax rate of 15% or to the regular tax rate based on their taxable income in accordance with the tax table under Section 24 (A) (1) (c) of the Tax Code of 1997, regardless of whether there is an alien executive occupying the same position ." In view of the foregoing and upon review of the responsibilities of Mr. Joel P. Cayacap, it is clear that he is vested with powers or prerogatives to lay down and execute management policies. Thus, his position is managerial in nature as defined by the Labor Code as well as the various BIR rulings on the matter and it follows, therefore, that the compensation received by him qualifies for the 15% tax rate under Section 25 (C) of the 1997 Tax Code and Article 61 of R.A. No. 8756, regardless of whether or not there is an alien executive occupying the same position. 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, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. CEaDAc Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service