BIR Ruling [DA-721-06]

December 15, 2006 BIR RULING [DA-721-06] RR 3-98; 33; DA-346-2003 GETZ Bros. Philippines, Inc . 5th Floor, Ortigas Bldg., Ortigas Avenue Pasig City Attention: Mr. Romualdo T. Rodil Vice President Gentlemen : This refers to your hereunder quoted letter dated July 13, 2006 requesting for an official ruling on the following viz: "1. House rental payments these refer to rental payments for the house to be used by the Business Development Manager, a British national, who will be based in the Philippines starting September 2006 and will be under the Regional Office. Please note that the Regional Office does not earn any income from the Philippines and its activities are limited to acting as a supervisory, communications and coordinating center for its affiliated subsidiaries in the Asia-Pacific Region and can therefore be classified as a Regional headquarter (RHQ). We understand that under R.A.8756, an act providing for the terms and conditions and licensing requirements of RHQs, an RHQ enjoys Zero-rated VAT on purchase of goods and services and lease of goods and property. If this provision of said R.A. still applies, can the GETZ Regional Office request for a VAT Zero-rated certificate so that it can avail of the VAT exemption?; "2. Will the house rental payments mentioned in item 1 above form part of the taxable compensation income of the manager or will this be subject only to the fringe benefits tax (FBT)? Assuming the latter case, what percentage of the house rental will be subject to FBT considering that the house will also be used by the Regional Office for business meetings and other similar business functions? "3. We also understand that the British national under the RHQ will be entitled to the 15% preferential tax on gross compensation income." HDTSIE In reply, please be informed of the following: 1. Section 4.108-5(b)(3) of RevenueRegulations15-2006 provides, viz: "Section 4.108-5. Zero-Rated Sale of Services "(b) Transactions Subject to Zero Percent (0%) VAT Rate. The following services performed in the Philippines by a VAT-registered person shall be subject to zero percent (0%) VAT rate: (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate;" On the other hand, Section 65 of E.O. No. 226 as amended by R.A. No. 8756 provides as follows: "Art. 65. Value-Added Tax. The regional or area headquarters established in the Philippines by multinational companies shall be exempted from the value-added tax. In addition, the sale or lease of goods or property and the rendition of services to regional or area headquarters shall be subject to zero percent (0%) VAT rate as provided in the National Internal Revenue Code as amended. DaTICc Regional operating headquarters shall be subject to the ten percent (10%) value-added tax as provided for under the National Internal Revenue Code, as amended." (cited in VAT Ruling No. 035-2001 dated June 13, 2001) On the basis of the foregoing, to be eligible for zero-rating, (1) the exemption of the person or entity with whom a VAT-registered person enters into a transaction must be provided under a special law (or international agreement); and (2) the exemption effectively subjects such transaction to zero rate. In this case, it is clear from Article 65 of E.O. No. 226, as amended, that RHQs are exempt from VAT and that sale of goods thereto are subject to the zero-percent (0%) VAT rate. Such being the case, and since the E.O. is a special law, this Office hereby rules that the lease agreement between GETZ Bros. & Co., Inc. and Trine E. Holdings, Inc., wherein the former is the lessee, shall be effectively subject to the zero-percent (0%) VAT rate. However, for Trine E. Holdings, Inc. to avail of the zero-percent rate, it is required to obtain an approved application for effective zero-rating, pursuant to Section 4.108.6 of RR 15-2006; otherwise, failure to obtain a prior approval, the transaction shall be considered only exempt from VAT. (BIR Ruling No. DA-346-2003 dated October 8, 2003) 2. Section 2.78.1 of Revenue Regulations No. 2-98 provides that the term "compensation" means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code. Thus, salaries, wages, emoluments and honoraria, allowances, commissions (e.g. transportation, representation, entertainment and the like); fees including director's fees, if the director is, at the same time, an employee of the employer/corporation; taxable bonuses and fringe benefits except those which are subject to the fringe benefits tax under Sec. 33 of the Code; taxable pensions and retirement pay; and other income of a similar nature constitute compensation income. Where the expatriate leases a residential property under the name of his employer, Section 2.33(B)(1)(a) of Revenue Regulations 3-98 provides that if the employer leases a residential property for the use of his employee and the said property is the usual place of residence of the employee, the value of the benefit shall be the amount of rental paid thereon by the employer, as evidenced by the lease contract. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit. Such being the case, the amount of the rent shall be treated as fringe benefit subject to the fringe benefit tax imposed under Section 33 of the Tax Code of 1997 as implemented by Revenue Regulations No. 3-98. 3. Anent the 15% preferential tax on gross compensation income, Section 10 of the Rules and Regulations Implementing Article 61 of R.A. 8756 provides 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, compensations, remuneration and emoluments to a final tax equal to fifteen percent (15%) of such gross income. Hence, compensation received by the British National occupying managerial and technical positions employed by Getz Bros. Phil. Inc. is subject to 15% preferential tax rate on such gross income. 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. DCIAST Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service