Leonardo Vicente & Associates

May 27, 2009 BIR RULING [DA-(ECB-013) 261-09] Sec. 108 (B) (3), E.O. 226 as amended; BIR Ruling Nos. DA-024-2007; DA-167-05; DA (ECB-009) 172-2009 Leonardo Vicente & Associates Certified Public Accountants Unit 55, Zeta II Building 191 Salcedo St., Legaspi Village Makati City Attention: Mr. Edgardo A. Leonardo Managing Partner Gentlemen : This refers to your letter dated March 16, 2009 requesting for and in behalf of your client, NGL PACIFIC LIMITED ("NGL"), for confirmation of your opinion regarding the tax implications of its importation/shipment of a vehicle and the withholding taxes on the salaries of the company's expatriates and local employees. CSHEca It is represented that NGL is a limited liability company organized under the laws of Hong Kong and registered as a Regional Headquarters with the Securities and Exchange Commission (SEC) under SEC Registration No. 357 dated April 18, 1983; that it acts and serves as a supervisory, communications and coordinating center for its affiliates, subsidiaries or branches within the Asia Pacific Region; that it is importing vehicle which is needed and to be used solely for its functions as regional or area headquarters; and that it currently employs expatriates and local employees for its activities as a Regional Headquarters in the country. In reply, please be informed that Article 65 of E.O. No. 226, as amended by Republic Act (R.A.) No. 8756, An Act Providing for the Terms, Conditions and Licensing Requirements of Regional or Area Headquarters, Regional Operating Headquarters, and Regional Warehouses of Multinational Companies, Amending for the Purpose Certain Provisions of Executive Order No. 226, otherwise known as The Omnibus Investments Code of 1987 , provides as follows, viz. : "Art. 65. Value-Added Tax . The regional or area headquarters established in the Philippines by multinational companies shall be exempted from 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 then ten percent (10%) [now 12%] value-added tax as provided for under the National Internal Revenue, as amended." Likewise, Article 64 and 67 of E.O. No. 226 as amended by R.A. No. 8756, specifically provides that: "Art. 64. Corporate Income Tax Incentives to Regional or Area Headquarters and Regional Operating Headquarters . Regional or Area Headquarters established in the Philippines by multinational companies and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets shall not be subject to income tax. Regional Operating Headquarters shall be subject to a tax rate of ten (10) percent of their taxable income as provided under the National Internal Revenue Code, as amended by Republic Act No. 8424; Provided, that any income derived from the Philippines sources by the ROHQ when remitted to the parent Company shall be subject to the tax on branch profit as provided for in Section 28(a)(5) of the National Internal Revenue Code. TCIEcH "Art. 67. Tax and Duty Free Importation of Training Materials and Equipment, Importation of Motor Vehicles. Regional or area headquarters and regional operating headquarters shall enjoy tax and duty free importation of equipment and materials for training and conferences which are needed and used solely for their functions as regional or area headquarters or regional operating headquarters and which are not locally available subject to the prior approval of the Board of Investments. "The sale or disposition of equipment within two (2) years after importation, entered tax and duty free, shall require prior approval of the Board of Investments and prior payment of applicable taxes and duties waived in favor of RHQ/ROHQ. "Regional or area headquarters and regional operating headquarters shall be entitled to the importation of new motor vehicles subject to the payment of the corresponding excise taxes and duties ." (emphasis supplied) Such being the case, it is clear from Article 64 and 65 of the E.O. No. 226, as amended, that regional headquarters are exempt from income tax and VAT. (BIR Ruling Nos. DA-167-05 dated April 15, 2005 and DA-024-2007 dated January 17, 2007) Further, the importation/shipment of a vehicle by NGL shall be subject to the payment of the corresponding excise taxes and duties but exempt from value-added tax (VAT). (BIR Ruling No. DA-024-2007 dated January 17, 2007) On the part of salaries of expatriates and local employees, Section 25 (C) of the Tax Code of 1997, as amended, 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. . . ." cDCaTS 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, as amended, shall apply. [DA (ECB-009) 172-2009 dated March 26, 2009] 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service