Ms. Ellen Rose Manuel-Pineda

October 27, 2008 BIR RULING [DA-(ECB-006) 361-08] DA414-07 Ms. Ellen Rose Manuel-Pineda 509 Makati Executive Center Leviste Street, Makati City M a d a m : This refers to your letter dated June 24, 2008 stating that your client, Norasian Energy Phils., Inc. (Norasian Energy), is a petroleum service contractor of the Philippine Government under Service Contract (SC) 69 on May 7, 2008 pursuant to the provisions of Presidential Decree (P.D.) No. 87; that under the terms of SC 69 the company, under the supervision and control of the Department of Energy (DOE), furnishes services, technology and financing, relative to the exploration and development of the Visayan Basin Area 8, containing an area of 704,000 hectares; that the exploration operations is for the purpose of discovering Petroleum-bearing traps by means of geological, geophysical, geochemical and other methods including exploratory well drilling; that all the works undertaken to determine the commerciality of traps in which Petroleum has been discovered, including Appraisal Well drilling and feasibility studies, formulation of Overall Development Program, and activities related to all such operations, including any work done prior to approval of the Overall Development Program in an attempt to identify a market for Natural Gas; that this project is highly specialized undertaking that deals with excavation of natural gas which is the raw material for power generation; that this relatively new technology which uses natural gas to produce power is slated to replace the old process of using imported crude oil for power generation; that to be able to carry out this operation, Norasian Energy, being a petroleum service contractor, requires all its employees and consultants to have technical proficiency and initiatives as well as specialized knowledge and skills prior to their employment; that such proficiency and specialized knowledge possessed by employees and consultants would have only be gained from previous work experience in a petroleum environment, both here and abroad; that to further enhance said proficiency and specialized knowledge and skills, Filipinos hired by Norasian Energy are mentored by expatriates temporarily assigned in the Philippines; and through the adoption of highly specialized processes and systems developed by the parent company NorAsian Energy Limited. Based on the foregoing representations, you now request for confirmation of your opinion that all employees, whether foreigners or Filipinos, employed and assigned by a foreign service contractor engaged in petroleum operations in the Philippines are subject to a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and other emoluments such as honoraria and allowances, received from such contractor. In reply thereto, please be informed that Section 25 (E) of the Tax Code of 1997 reads: "(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. An alien individual who is a permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, received from such contractor or subcontractor: Provided, however, That the same tax treatment shall apply to a Filipino employed and occupying the same position as an alien employed by petroleum service contractor and subcontractor. EAcHCI Any income earned from all other sources within the Philippines by the alien employees referred to under Subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax, as the case may be, imposed under this Code." 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 position 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. IN LIGHT OF ALL FOREGOING, this Office holds that since the Filipino employees and consultants employed by Norasian Energy, specifically require technical proficiency and initiatives, fall within the condition set by Revenue Regulations No. 6-2001, as amended by Revenue Regulations No. 12-2001, inasmuch as these employees are required to have technical proficiency and initiatives as well as specialized knowledge and experience in the performance of their functions, the same tax treatment is applicable to Filipinos employed and occupying the same positions as those aliens employed by Norasian Energy. Accordingly, the Filipino employees working for Norasian Energy 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. 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. EDCTIa Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service