Romulo Mabanta Buenaventura Sayoc & De Los Angeles

August 13, 2008 BIR RULING [DA-(ECB-002) 143-08] DA061-04 Romulo Mabanta Buenaventura Sayoc & De Los Angeles 30th Floor, Citibank Tower 8741 Paseo de Roxas Makati City Attention: Atty. Enriquito J. Mendoza Partner and Atty. Jayson L. Fernandez Partner Gentlemen : This refers to your letter dated July 15, 2008 stating that your client, CalEnergy International Services, Inc.-Philippines Regional Operating Headquarters (ROHQ), is a multinational company incorporated under the laws of the State of Delaware, USA; that it is part of a group of affiliated companies engaged in the business of developing and producing energy from diversified fuel sources including geothermal, natural gas and hydroelectric powerplants in various countries; that CalEnergy is licensed to do business in the Philippines as a Regional Operating Headquarters (CalEnergy ROHQ) by the Securities and Exchange Commission (SEC) under SEC Registration No. A200203605 dated March 4, 2002, with office address at 24/F 6750 Building, Ayala Avenue, Makati City; that as stated in its SEC Registration, CalEnergy ROHQ shall engage in general administration and planning, business planning and coordination, sourcing and procurement of raw materials and components, corporate finance advisory services, marketing control and sales promotion, training and personnel management, logistic services, research and development services and product development, technical support and maintenance, data processing and communication, and business development; that CalEnergy ROHQ currently has 21 regular employees and provides support service to CalEnergy affiliates located in North America, Europe and Asia; that specifically, the services performed by CalEnergy ROHQ to its affiliates pursuant to its registered activities relate to finance and accounting, legal, human resources, corporate social responsibility, procurement, administration, and information and communication technology support services; that in order to carry out these functions, CalEnergy ROHQ has employed Filipinos to occupy various managerial and/or technical positions in CalEnergy ROHQ with the following principal functions: a. Vice-President leads all functional units of the ROHQ comprising of finance and accounting, legal, human resources, corporate social responsibility, procurement, administration, and information and communication technology; DEIHAa leads the development of policies, strategies and directives for the group and ensures their efficient implementation to achieve optimum operating results, operational excellence, full regulatory compliance and superior customer relations; coordinates effort with the U.S. principal office to ensure that the company's global strategies, programs and initiatives, including those developed pursuant to the requirements of the Sarbanes-Oxley Act, are implemented in the Philippine platform. cCaDSA b. Head of Accounting responsible in directing the accounting functions including delivering timely and relevant financial, management and statutory reports and analysis; developing financial plans, budgets and forecasts; and overseeing financial audits and reviews; aSITDC in charge of preparing quarterly and annual reports submitted to the US Securities and Exchange Commission; responsible for the review, update and implementation of finance and accounting policies and procedures and internal controls and ensures compliance to such policies and procedures and all other statutory and regulatory requirements; DETACa actively participates in the performance of business control reviews and audits for various processes of the company such as disbursement and expense, revenue, financial close and fixed assets cycles; oversees the accounts payable and disbursement function and the treasury function, including cash management and maintaining relationships with banks and other financial institutions; DAETcC primarily responsible in ensuring that the US principal office's initiatives to comply with the requirements of the Sarbanes-Oxley Act are implemented efficiently and timely. c. Head of Tax Services coordinates the development and implementation of international tax strategies for the group to ensure compliance and minimize overall tax exposure; TEAaDC manages the handling of pending tax audits and tax cases pending before administrative and judicial bodies; in charge of the consolidation of financial reports, budgets and supplemental reports including variance analysis; oversees the accounting processes for some CalEnergy affiliates operating in North America, Europe and Asia; ATCaDE oversees the timely filing of all tax and information returns and payment of corresponding taxes. d. Head of Legal & Compliance leads, directs and controls legal activities to protect the company's reputation and business interests and ensures that it complies with all relevant laws and regulations by performing a variety of complex or specialized legal activities; ETDHaC in charge of all legal and regulatory compliance for the operations in the Philippines as well as the compliance requirements of the US Securities and Exchange Commission or other US agencies, as applicable; coordinates with the legal department of the company's US principal office on all legal matters affecting the organization. cAHDES e. Head of Human Resources draws out actions to develop and implement integrated human resources strategies by putting in place functional and updated people systems to attract, manage, develop and retain employees for the company's current and future requirements; leads the company-wide staffing and recruitment, employee training, employee communication, industrial and employee relations, performance management, compensation and benefits administration, and employee welfare programs administration; aASDTE works with the risk and safety department in implementing safety improvement plans and facilitating changes towards the development of safety culture; ensures that all programs and strategies for the Philippine operations are aligned with the direction of the US principal office. aIcHSC f. Head of Corporate Social Responsibility and Public Relations oversees the general administrative function for the ROHQ; responsible for the development and monitoring of the company's corporate social responsibility and public relations programs, including government relations, community services and corporate communications; CSTEHI directs and coordinates closely with different department heads on the implementation of the corporate social responsibility and public relations programs, and sees to it that such programs are viable and relevant to the company vis--vis the overall direction of the US principal office. g. Head of Systems and Logistics responsible for the financial and inventory control program and process flow covering the end-to-end supply chain solution; DACTSH administers the Computerized Maintenance Management Solutions, the maintenance program used at the plant, which includes data capturing, audit programs and non-conformance material flow process; drives the supply chain initiatives such as Continuous Replenishment, Vendor Hub Programs within the network, maintains Financial Statement Generators and leads the development of Business Intelligence Reports; ASHaTc conducts and manages purchasing process, supply environment, policy development and value enhancement strategies for supply chain; oversees the implementation of procurement programs initiated by the US principal office; ensures that policies and programs developed in compliance to the requirements of the Sarbanes-Oxley Act are implemented efficiently, accurately and timely. IDSEAH h. Head of Information and Technology responsible for the planning, execution, measurement and correction of all information and communication technology programs and activities by ensuring highest possible service availability and reliability while ensuring compliance to policies and directives of both the CalEnergy Philippine Operations and the US principal office; ensures that policies and programs developed in compliance to the requirements of the Sarbanes-Oxley Act are implemented efficiently, accurately and timely. aCTHDA Based on the foregoing representations, you now request for confirmation of your opinion that 1. The Filipino managerial and/or technical personnel of CalEnergy's ROHQ in the Philippines occupying the positions of Vice President as well as the Heads of various departments such as Accounting, Tax Services, Legal & Compliance, Human Resources, Corporate Social Responsibility and Public Relations, Systems and Logistics and Information and Communication Technology, are entitled to the 15% preferential tax rate provided under Section 25 (3) (C) of the Tax Code of 1997, in relation to Republic Act (R.A.) No. 8756; and 2. The ROHQ's Filipino managerial and technical employees have the option to be taxed at either fifteen percent (15%) of their gross income or the regular tax rate based on their taxable income, regardless of whether there is an alien similarly occupying such technical or managerial positions. ACIDTE In reply thereto, please be informed that Section 25 (C) of the Tax Code of 1997 provides that "(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 . . . ." 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. THIECD IN VIEW OF THE FOREGOING, since the positions of the ROHQ personnel enumerated above are managerial in nature as they are vested with powers or prerogatives to lay down and execute management policies, this Office hereby confirms your opinion that 1. the compensation received by Filipino employees of CalEnergy ROHQ holding managerial and technical positions are subject to the 15% tax rate under Section 25 (C) of the Tax Code of 1997 in relation to Article 61 of R.A. No. 8756, regardless of whether or not there is an alien executive occupying the same position. SDITAC 2. CalEnergy ROHQ's Filipino managerial and technical employees have the option to be taxed at either 15% of their gross income or the regular tax rate based on their taxable income, regardless of whether there is an alien similarly occupying such technical or managerial positions. 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. DIAcTE Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service