Taxability of Regional Operating Headquarters

September 24, 2004 BIR RULING NO. 021-04 22 (EE), 28, 31 E.O. 226 000-00 Angel Jurado & Coloma 1402-A (West Tower) Philippine Stock Exchange Center Ortigas Center, Pasig City, Philippines Attention: Mayette de Leon Gentlemen : This refers to your letter dated October 17, 2001 requesting for a BIR Ruling on the basis of the ten percent (10%) taxable income of regional operating headquarters. Section 22 (EE) of the Tax Code of 1997 (Tax Code) provides: "SEC. 22. Definitions . When used in this Title: "xxx xxx xxx" "(EE) The term ' regional operating headquarters ' shall mean a branch established in the Philippines by multinational companies which are engaged in any of the following services: 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." Further, Section 28 (6)(b) of the Tax Code states: "SEC. 28. Rates of Income Tax on Foreign Corporations . "(6) Regional or Area Headquarters and Regional Operating Headquarters or Multinational Companies. (a) . . . (b) Regional operating headquarters as defined in Section 22(EE) shall pay a tax of ten percent (10%) of their taxable income. On the basis of the aforequoted, you wish to inquire the basis of the ten percent (10%) taxable income when in Section 22 it appears that these offices are not deriving income from any source at all. More particularly you wish to be clarified on what comprises the income of regional operating headquarters. In reply, please be informed that Republic Act No. 8756 (R.A. 8756), amending certain portions of Executive Order No. 226 (E.O. 226) (otherwise known as the Omnibus Investments Code of 1987) defines regional or area headquarters (RHQ) and regional operating headquarters (ROHQ) as follows: "SEC. 2. Definition of Terms . For purposes of this Act, the term: "xxx xxx xxx "2) Regional or Area Headquarters (RHQ) shall mean an office whose purpose is to act as an administrative branch of a multinational company engaged in international trade which principally serves as a supervision, communications and coordination center for its subsidiaries, branches or affiliates in the Asia-Pacific Region and other foreign markets and which does not earn or derive income in the Philippines; and "3) Regional Operating Headquarters (ROHQ) shall mean a foreign business entity which is allowed to derive income in the Philippines by performing qualifying services to its affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific Region and in other foreign markets; Based on the foregoing, it is clear that as distinguished from an RHQ, which does not earn or derive income in the Philippines, an ROHQ is allowed to derive income in the Philippines by performing qualified services to its affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific Region and in other foreign markets, which income shall be taxed in accordance with Article 64 of E.O. 226, as amended by R.A. 8756, as follows: "Art. 64. Corporate Income Tax Incentive 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 percent (10%) of their taxable income as provided for under the National Internal Revenue Code, as amended by Republic Act No. 8474: Provided, That any income derived from Philippine sources by the ROHQ when remitted to the parent company shall be subject to the tax on branch profit remittances as provided for in Section 28(A)(5) of the National Internal Revenue Code ." (emphasis supplied) Consistent with the provisions of E.O. 226, as amended by R.A. 8756, Section 28 (A)(6)(b) of the Tax Code of 1997 provides for a tax at the rate of ten percent (10%) based on taxable income of ROHQs. In addition, the applicable branch profit remittance tax (BPRT) rate for income remittances is specified under Section 28(A)(5) which provides: "SEC. 28. Rates of Income Tax on Foreign Corporations . "(A) Tax on Resident Foreign Corporations "xxx xxx xxx "(5) Tax on Branch Profit Remittances . Any profit remitted by a branch to its head office shall be subject to a tax of fifteen percent (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code. Provided, That interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages, premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines." Likewise, pursuant to Article 65 of E.O. 226, as amended by R.A. 8756, "Regional operating headquarters shall be subject to the ten percent (10%) value-added tax as provided for under the National Internal Revenue Code, as amended." In sum, an ROHQ may be subject to the following taxes: 1. ten percent (10%) income tax based on taxable income; 2. fifteen percent (15%) BPRT under Section 28(a)(5) of the Tax Code of 1997 on income of the ROHQ derived from Philippine sources, when remitted to the parent company; and 3. ten percent (10%) value-added tax. The ten percent (10%) tax on ROHQ shall be based on taxable income from its qualifying services to its affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific Region and in other foreign markets, said taxable income shall consist in ". . . the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any authorized for such types of income by this Code or other special laws." (Section 31, Tax Code of 1997) Further, a BPRT at the rate of fifteen percent (15%) may be imposed when the taxable income is remitted to the parent company. DaTEIc This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered void. Very truly yours, (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue