Whether Regional or Area Headquarters and Certain Alien Executives Are Subject to Income Tax

June 21, 2002 BIR RULING NO. 024-02 22 (DD); 28 (A) (6) (a) 047-2001 Board of Investments Industry & Investments Building 385 Sen. Gil J. Puyat Avenue, Makati City Attention: Adelina E. Batallones OIC Director One-Stop Action Center Gentlemen : This refers to your letter dated 27 February 2002 forwarding the request of Philippine Australia Business Council regarding the assistance sought by Indophil Resources Head Office (Melbourne). SaHIEA It is represented that Indophil Resources Head Office (Melbourne) ("Indophil" for brevity) is an Australian Company licensed by the Securities and Exchange Commission in 1999 to establish a Regional Headquarters. Based on this, Indophil requests the issuance of a certification/statement from the Bureau of Internal Revenue on the following: 1. Expats/alien executives occupying managerial and technical positions employed by Regional or Area Headquarters (RHQ) and Regional Operating Headquarters (ROHQ) are subject to withholding tax of 15% on compensation income. 2. Regional or Area Headquarters are exempt from payment of corporate income taxes. In reply, please be informed that 1. Section 10 of the Rules and Regulations Implementing Article 61 of R.A. 8756 provides 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, compensations, remuneration and emoluments to a final tax equal to fifteen percentum (15%) of such gross income. In relation thereto, Section 2.57.1 (D) of Revenue Regulations No. 2-98, as amended by Revenue Regulations 6-2001, also provides that 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. Thus, expats/alien executives occupying managerial and technical positions employed by regional or area headquarters and regional operating headquarters are subject to withholding tax of 15% on compensation income. 2. Section 28 (A) (6) (a) of the Tax Code of 1997 provides that regional or area headquarters as defined in Section 22 (DD) of the said Code shall not be subject to income tax. Section 22 (DD) of the Tax Code of 1997 defined the term "regional or area headquarters" as "a branch established in the Philippines by multi-national companies and which headquarters do not earn or derive income from the Philippines and which act as a supervisory, communications and coordinating center for their affiliates, subsidiaries or branches in the Asia-Pacific Regional and other foreign markets." Likewise, Article 63 of Executive Order No. 226, otherwise known as the Omnibus Investments Code as amended by R.A. 8756, provides that regional or area headquarters established in the Philippines by multinational companies and which headquarters do not earn or derive income from within the Philippines and do not participate in any manner in the management of any subsidiary or branch office it might have in the Philippines nor solicit or market goods and services whether on behalf of its mother company or its branches, affiliates, subsidiaries and any other company and which acts 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. It must be noted that for tax purposes, a regional or area headquarters, in acting as a supervisory, communications and coordinating center for its affiliates in the region, shall not render any of the following qualifying services: General administration and planning; Business planning and coordination; Sourcing/procurement of raw materials and components; Corporate finance and 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, which functions are applicable to a Regional Operating Headquarters pursuant to Section 4(b) of the Rules and Regulations implementing R.A. No. 8756. Accordingly, Indophil will not be subject to income tax as long as in performing its functions and in acting as a supervisory, communications and coordinating center for its affiliates in the region, it shall not render any of the foregoing qualifying services. Otherwise, it shall be taxed as a regional Operating Headquarters. It is understood that Indophil's books of accounts and other pertinent records shall be subject to periodic examination by revenue enforcement officers of this Bureau for the purpose of ascertaining whether Indophil is complying with the conditions under which it is granted tax exemption or tax incentives and its tax liability, if any, pursuant to Section 235 of the Tax Code of 1997. 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.) REN G. BAEZ Commissioner of Internal Revenue