Isla Lipana & Co.

August 13, 2008 BIR RULING [DA-(ECB-001) 142-08] 25 (C); DA-118-2003 Isla Lipana & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Atty. Alexander B. Cabrera Managing Partner, Tax Services Gentlemen : This refers to your letter dated August 13, 2007 requesting, on behalf of your client Azeus Systems Philippines Limited Regional Operating Headquarters, for a confirmatory ruling that the positions held by certain Filipino personnel of the company qualify as managerial and/or technical positions which are qualified for the fifteen percent (15%) preferential tax rate on their gross income under Section 25 (C) of the National Internal Revenue Code and Section 51 of Republic Act No. 8756 or at the regular graduated individual income tax rates based on taxable income. CDcaSA It is represented that Azeus Systems Manila (BVI) Ltd. is a multinational company organized and existing under the laws of the British Virgin Islands; that it established a regional operating headquarters in the Philippines under the name Azeus Systems Philippines Limited (ASPL) which was registered with the Securities and Exchange Commission on March 28, 2007 under SEC Company Registration No. FS200704860; that as provided under its license, ASPL may engage in research and development of computer software and information technology-related products; that the ROHQ is established in the Philippines to render any or all of the above services to its affiliates, branches and subsidiaries in the Asia Pacific Region and other foreign markets; that to carry out these operations, ASPL employed Filipino personnel to occupy the following managerial and/or technical position with the corresponding functions: 1. Developer responsible for creating software programs according to system specifications designed by System Analysts; provides expertise in resolving technical problems reported by systems users; requires high level or proficiency in different programming languages such as Microsoft, Net, Java, Oracle Developer, Crystal Reports, etc.; requires strong knowledge on various technologies such as data encryption, wireless data transmission, PDA programming, search engines, web services, e-forms, digital signatures, etc.; SDHETI 2. Test Engineer responsible for ensuring high quality of software and other technical work products that are delivered to client; formulates complex software test cases and performs various types of test techniques and procedures (such as load testing, performance testing, stress testing, white-box testing and black-box testing) at different stages of computer system development; since there are no formal training in universities to prepare candidates for test engineer role, extensive in house technical training is provided to equip test engineers with the proper skills to carry out software testing work; 3. System Administrator handles installation and maintenance of computer hardware and software on servers and workstations for organization and project use; ensures a stable network through monitoring of network traffic and protects it against virus infection and security intrusion attacks; AIHTEa 4. Technical Writer responsible for composing (writing/creating/conceptualizing/updating), editing and formatting technical documents including system/project documentation (technical proposals, technical manuals, training manuals, system help, etc.); handles Capability Maturity Model (CMM)-related process documentations; 5. Office Manager responsible for laying down and executing management policies, imposes disciplinary actions including suspension on erring employees, interviews applicants and is vested with power to hire and terminate administrative personnel; manages and directs the work of the administration team; and TAcDHS 6. Recruitment Manager responsible for screening and interviewing applicants, recommends and/or authorize the hiring of technical personnel such as developers, test engineers and system administrators, manages and directs the work of the recruitment team. that aside from the Office and Recruitment Managers, the positions in Nos. 1 to 4 above are considered managerial employees upon reaching the rank of "Associate"; and that as such, they take part in drafting and formulating company policies, recommend and/or authorize hiring and termination of employees and supervise various teams to deliver projects. HSaCcE In reply thereto, please be informed that Section 25 (C) of the NIRC, reads: "(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 are 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, . . ." Corollarily, Section 2.57.1 (D) of Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001, and as further amended by Revenue Regulations No. 12-2001 and Section 10 of the Rules and Regulations Implementing Article 61 of R.A. No. 8756 provide 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, compensation, remuneration and emoluments to a final tax equal to fifteen percent (15%) of such gross income and that the same tax treatment is applicable to Filipinos employed and occupying the same positions as those aliens, 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. In case of the latter, the withholding tax rates under Sections 2.78 and 2.79 of Revenue Regulations No. 2-98 shall apply. CADHcI In the light of all the foregoing, since the positions of the ASPL personnel enumerated above clearly require technical proficiency and initiative from the individuals occupying such position, this Office holds that such employees shall be subject to either the preferential tax rate of 15% or to the regular tax rate based on their taxable income, regardless of whether there is an alien similarly occupying such technical or managerial positions. (BIR Ruling No. 118-2003 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 disclosed that the facts are different, then this ruling shall be considered null and void. SITCcE Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner