Sebastian Liganor & Galinato

October 22, 2008 BIR RULING [DA-(C-103) 325-08] 28 (A) (6) (a); 25 (C); R.A. 8756; 118-03 Sebastian Liganor & Galinato 1409 East Tower, Philippine Stock Exchange Centre Exchange Road, Ortigas Center, Pasig City Attention: Attys. Jon Michael P. Alamis and Sheryl L. Olao Gentlemen : This refers to your letter dated July 17, 2008 requesting on behalf of your client, Wall Street Global Investment Management, Ltd. (Regional Headquarters) (hereafter, the RHQ) in connection with the fiscal incentives to which said RHQ, its expatriates and Filipino counterparts are entitled to. The facts as represented are as follows: The RHQ is registered with the Philippine Securities and Exchange Commission (SEC) under SEC Registration No. FS200805140 dated April 3, 2008 as a Regional Headquarters of Wall Street Global Investment Management, Ltd. (WSG Investment Management), a multinational company organized and existing under the laws of the Cayman Islands. The RHQ serves as a supervision, communication and coordination center for WSG Investment Management and its affiliates around the world. Thus, the RHQ does not derive any income from sources within the Philippines, and does not perform the following services: (a) General administration and planning; (b) Business planning and coordination; (c) Sourcing or procurement of raw materials and components; (d) Corporate finance and advisory services; AICDSa (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. The managerial and technical positions occupied by Filipinos and their corresponding responsibilities in the RHQ are enumerated as follows: (a) Chief Operating Officer Primarily responsible for the day-to-day management of the RHQs operations, including matters concerning its employees, internal systems and business processes. (b) Head, Institutional Investors Primarily responsible for analyzing business requirements and recommending systems solutions to management, including solutions relating to business development. (c) Head, Compliance and Risk Management Primarily responsible for the establishment and maintenance of an effective compliance oversight program for the RHQ including such policies, procedures and internal controls as may be required by applicable law and the exigencies of the RHQs operations. (d) Communications Manager Primarily responsible for the creation, coordination and management of a communications program, including all internal and external corporate communications. (e) Manager, IT Network Operations Primarily responsible for the maintenance and support of all IT infrastructure related operations, including the identification of IT infrastructure requirements, solutions and systems. cEHSTC (f) Manager, IT Software Primarily responsible for the design, development and maintenance of software systems to meet the requirements of the RHQ and its affiliates in the region, which includes the development of existing programs by analyzing and identifying areas for modification and improvement. (g) Regional Accountant Primarily responsible for the preparation of all accounting and financial statements of the RHQ and its affiliates within the region, ensuring that such statements are prepared in accordance with international accounting standards, applicable laws and other regulatory requirements. (h) Manager, Budget Monitors all budgeting and accounting transactions, and supervises the annual budget process preparation and reporting requirements of the RHQ. You now request confirmation that: 1. The RHQ is exempt from payment of corporate income tax and from the filing of the corresponding corporate income tax return; 2. The RHQ is exempt from value-added tax (VAT). In addition, the sale or lease of goods and property and the rendition of services to the RHQ shall be subject to zero-percent (0%) VAT; and 3. Filipino employees of the RHQ occupying the same positions as those aliens employed by the RHQ are entitled to the preferential fifteen percent (15%) tax regardless of whether or not there is an alien executive occupying the said position; In reply thereto, please be informed as follows: 1. Section 28 (A) (6) (a) of the Tax Code of 1997, as amended, provides: "(6) Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. HICcSA (a) Regional or area headquarters as defined in Section 22(DD) shall not be subject to income tax." Inasmuch as regional or area headquarters is a branch established in the Philippines by multinational companies acting merely as supervisory, communications and coordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets and which does not derive income from the Philippines, RHQ is exempt from income tax and as such is exempt from the filing of the corresponding corporate income tax return. 2. Section 109 of the 1997 Tax Code, as amended, exempts from VAT services rendered by regional or area headquarters established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and which do not earn income from the Philippines. In addition, Article 65 of Executive Order No. 226, as amended by Republic Act No. 8756 provides: "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 and property and the rendition of services to regional or area headquarters shall be subject to zero percent (0%) VAT rate as provided for in the National Internal Revenue Code, as amended. 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." In view thereof, this Office hereby opines that a regional or area headquarters are not subject to VAT since they do not derive any income from sources within the Philippines. Likewise, the sale or lease of goods and property and/or the rendition of services to a regional headquarters are subject to 0% VAT. 3. Pursuant to Section 25 (C) of the Tax Code of 1997, as amended, viz.: TcAECH "(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 of aliens employed by these multinational companies. For purposes of this Chapter, 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." Also Section 2.57.1 (D) of Revenue Regulations (RR) No. 2-98, as amended, provides: "(D) Income Derived by Alien Individuals Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. xxx xxx xxx The same tax treatment is applicable to Filipinos employed and occupying the same positions as those of aliens employed by regional or area headquarters and regional operating headquarters of multinational companies, regardless of whether or not there is an alien executive occupying the same position, provided, that such 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 with the Tax Code of 1997. In case of the latter, the withholding rates under Sections 2.78 and 2.79 of Revenue Regulations No. 2-98 shall apply. TECIaH xxx xxx xxx" Corollary thereto, Section 10 of the Rules and Regulations Implementing Article 61 of R.A. No. 8756 provides that alien executives occupying managerial and technical positions employed by 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 15% of such gross income and that 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. 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, as amended, pursuant to Article 61 of Executive Order (E.O.) No. 226, otherwise known as the Omnibus Investments Code of 1987, as amended by Section 5 of R.A. No. 8756. In BIR Ruling No. 047-01 dated September 28, 2001, which is a deviation from BIR Ruling No. 147-98 dated October 16, 1998, this Office ruled that ". . . Filipino employees of the proposed RHQ occupying managerial and technical positions equivalent to alien executives will be subject either to the preferential tax 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 1997 Tax Code, regardless of whether there is an alien executive occupying the same position". In view of the foregoing, this Office holds that the alien and Filipino employees of RHQ who will occupy and are occupying managerial and technical positions are qualified for the 15% preferential tax rate on their gross income, regardless of whether or not RHQ has alien employees occupying similar positions. Moreover, the Filipino employees of RHQ who are holding managerial and technical positions have the option to be taxed at either 15% of their gross income or the regular tax rate based on their taxable income (BIR Ruling No. 118-03 dated April 14, 2003). This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be ascertained that the facts are different, then this ruling shall be considered as null and void. CAcEaS Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service