Isla Lipana & Co.

June 3, 2009 BIR RULING [DA-(ECB-015) 267-09] 25 (C); RR 2-98; DA-250-08; DA-301-08; DA-(ECB-002)-143-08; DA-(ECB-009)-577-08 Isla Lipana & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty. Malou P. Lim Partner Gentlemen : This refers to your letter dated December 11, 2008 stating that your client, Sun Life Financial Asia Services Limited ("Sun Life"), is a multinational company organized and existing under the laws of Hong Kong; that it has a regional operating headquarters ("ROHQ") in the Philippines registered with the Securities and Exchange Commission on October 24, 2008; that the ROHQ is licensed to engage in the following activities: general administration and planning, business planning and coordination, corporate finance advisory services, marketing control and sales promotion, training and personnel management, logistics services, research and development services and product development, technical support and maintenance, data processing and communication, and business development; that the ROHQ has employed individuals to occupy the following managerial and technical positions in order to carry out its operations: CIAHDT Generic Titles Job Description Chief Operations Develops long-term Operations and IT strategic Officer, Asia plans for the region Defines operational metrics and puts in place measurement, monitoring and reporting systems Monitors, analyzes and reports operational issues, opportunities as well as development plans Understands needs and requirements in the region and develops relevant solutions Keeps the region informed of all Operations and IT objectives initiatives, and results thereof Provide advice on and coordinate, process management initiatives Ensures availability of appropriate IT infrastructures, support services and technologies Responsible for ongoing management, improvement and strategic direction of the Shared Services organization Leads the Operations and IT function Keeps abreast of developments in operation management and information technology and populate the relevant knowledge Participates in development and evaluation of strategy and performance Ensures compliance with organizational requirements and corporate governance Enhances budgetary control across the region Head, Shared Services Overall accountability over the delivery of IT shared services, solutions applications, and systems to the country operations in the region Key role in managing the direction and control of the IT function in the region including infrastructure and architecture planning, resources planning, project management and delivery, IT Operations, quality assurance and information security Key role in managing relationships with country operations. Leads the Shared Services function Establishes, and ensures achievement of, services level standards Head, Process Institutes and directs process improvement and Management quality management programs in the region Works with country operations in establishing process management expertise, identifies training needs, provides training, and assists in hiring resources Provide advice on process management and improvement Institutes measurement, analysis and reporting of operational metrics and key performance indicators Monitors and analyzes trends to determine deficiencies and recommends programs in response thereto Works with country operations and PMOs to implement relevant programs Directs process improvement programs and facilitates the sharing of best practices across the region Represents Asia in corporate business process management initiatives Head, Operational Overall manager of operations plans and Change projects in support of the operations strategies throughout the region, including operations improvement programs, change management programs, training programs, IT projects and other supporting programs Analyses with regional and country operations the business processes and develops improvement plans Collaborates with the HR function in developing and implementing change management programs Identifies and develops country resources Manages specific regional or cross-border projects, as required. In connection therewith, you now request confirmation of the following opinions: A. The Sun Life ROHQ employees (both aliens and Filipinos) occupying the managerial and/or technical positions enumerated above and performing the qualifying services indicated above are entitled to the 15% preferential tax rate on gross income; and B. The Filipino employees occupying the managerial and/or technical positions mentioned above and performing the qualifying services stated have the option to be taxed at either 15% of their gross compensation income or at the regular graduated individual income tax rates based on their taxable income, regardless of whether there are aliens similarly occupying such positions. In reply thereto, please be informed that taxation of alien individuals and their Filipino counterparts who are employed by ROHQs of multinational companies has been expressly provided under Section 25 (C) of the Tax Code of 1997, which pertinently 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 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 10 of the Rules and Regulations Implementing Article 61 of Republic Act 8756 provides that alien executives occupying managerial and technical positions employed by ROHQs of multinational companies shall be subject for each taxable income to a final tax equal to fifteen percent (15%) based on their gross income received as salaries, wages, annuities, compensation, remuneration and emoluments. Moreover, the rules provide 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. EcAHDT Similarly, Section 2.57.1 (D) of Revenue Regulations (RR) No. 2-98, as amended by RRs 6-2001 and 12-2001 provides "(D) Income Derived by Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. A final withholding tax equivalent to fifteen percent (15%) shall be withheld by the withholding agent from the gross income received by every alien individual occupying managerial and technical positions in 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, except income which is subject to the fringe benefits tax, from such regional or area headquarters and regional operating headquarters. aASEcH 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 if the employer (Regional Operating Headquarters/Regional or Area Headquarters) is governed by Book III of E.O. 226 as amended by R.A. 8756. In case the Filipino opted to be taxed at the regular tax rate under Section 24 of the Tax Code of 1997, the provisions of Section 2.79 (A) to (D) of Revenue Regulations No. 2-98 shall apply." In applying the above-cited provisions, this Office, in BIR Ruling No. DA (ECB-009) 577-2008 dated December 24, 2008, ruled that "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 IPG 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. 2. IPG 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." Considering that the positions occupied by the ROHQ personnel enumerated above clearly require technical proficiency and initiative from the individuals occupying such position, this Office hereby confirms your opinion that DCcHIS A. The Sun Life ROHQ employees (both aliens and Filipinos) occupying the managerial and/or technical positions enumerated above and performing the qualifying services indicated above are entitled to the 15% preferential tax rate on gross income; and B. The Filipino employees occupying the managerial and/or technical positions mentioned above and performing the qualifying services stated have the option to be taxed at either 15% of their gross compensation income or at the regular graduated individual income tax rates based on their taxable income, regardless of whether there are aliens similarly occupying such positions. This ruling is being used 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. AaECSH Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service