Filipino Managerial or Technical Employees of ADB Subject to 15% Preferential Tax Rate on Gross Compensation Income

March 11, 1999 BIR RULING NO. 029-99 25 (C)-000-00-029-99 Asian Development Bank 6 ADB Avenue, Mandaluyong City Attention: Ms . Patricia Z . Riinaen Alternate Director Gentlemen : This refers to your letter dated January 18, 1999 requesting for a ruling to the effect that Filipino Bank staff employed in similar positions as foreign Bank staff of the Asian Development Bank (Bank) be entitled to the same tax privileges with respect to their salaries from the Bank as their Filipino counterparts working for Regional or Area Headquarters and Regional Operating Headquarters of multinational companies in the Philippines. It is represented that by virtue of the Agreement Establishing the Asian Development Bank (Charter), the salaries and emoluments paid by the Bank to its Directors, alternates, officers and employees are exempt from tax; that only Filipinos and Americans are subject to income tax because the Philippines and the US retained the right to tax their citizens on the income received from the Bank; that in the case of the American Bank staff, however, there is apparently an exclusion from taxable income to the extent of $70,000; that Filipino Bank staff assigned to work at one of the Bank's branches or "missions" located outside the Philippines are not taxed on salaries they receive from the Bank since they are income derived from sources outside the Philippines pursuant to Section 23(B) of the Tax Code of 1997; that only Filipino Bank staff who work in the Philippines bear the full brunt of taxation by their own country; that the taxation of salaries received by Filipino Bank staff working in the Philippines should be the same as the taxation of salaries of other Bank staffs, whether foreign or Filipino working abroad; that at the very least, Filipino Bank staff working in the Philippines should be subject to the preferential income tax rate provided in Section 2S(C) of R.A. 8424; that Filipino Bank staff, who occupy positions similar to those held by foreign Bank staff, should enjoy the same tax privilege enjoyed by their peers who work for regional headquarters located in the Philippines; that by Agreement between the Bank and the Government of the Republic of the Philippines regarding the Headquarters of the Bank (the Headquarters Agreement), the Bank established its Headquarters, or main office or seat, in Manila, Philippines; that the Bank has also established and continues to establish, branches or "missions" throughout the region; that all of these branches or "missions" report back to Headquarters in Manila; that Section 25(C) of R.A. 8424 speaks of a branch office that performs the functions of a regional headquarters in the Philippines; that it is submitted that the provision could not have meant to exclude similarly situated offices acting as regional headquarters, simply because such offices also constitute the main seat or office of the corporate body; that the Bank is not a domestic firm; that it is an international entity and its Headquarters, which is located in the Philippines coordinates all the Bank's activities throughout the region and beyond; that the Headquarters of the Bank, located in Manila, Philippines, should be deemed to be a regional or area headquarters or a regional operating headquarters under the provision of Section 25(C) of R.A. 8424; that you are of the opinion that the Filipinos engaged by the Bank whether at managerial or supervisory levels, or otherwise, should enjoy the privilege granted under Section 2S(C) of R.A. 8424, provided that they hold positions that are the same as positions held by foreigners; that to exclude the Filipino Bank staffs who work in the Philippines from the privilege accorded under Section 20(C) of R.A. 8424 is to reduce them to second class citizens in their own country and to discriminate against them without reasonable basis; and that there is no substantial distinction, on which to base any tax discrimination between Filipino Bank staff working in the Philippines and Filipino Bank staff working outside the Philippines nor is there any such distinction between those Filipino Bank staff and the foreign Bank staff, or their Filipino peers (or foreigners) working for mere branches that act as regional headquarters. prcd In reply, please be informed that Filipino Bank staff who work in the Philippines cannot be granted exemption from income tax on their salaries received from the Bank. Otherwise, we will violate Section 23(A) of the Tax Code of 1997 which categorically provides that "a citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines ." (Emphasis ours) However, under the provisions of Section 25(C) of the same Code reading: SEC. 25. Tax On Nonresident Alien Individual. "(A) . . . "(B) . . . "(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. For purposes of this Chapter, the term ' multinational company' means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific and other foreign markets." this Office believes that it would be proper to grant such preferential tax treatment to Filipino Bank staff working in the Philippines. In BIR Ruling No. 147-98 dated October 16, 1998, this Office ruled that Filipinos employed and are occupying managerial or technical positions as those of alien employed by the regional or area headquarters (R/AH) or regional operating headquarters (ROH) of multinational companies are subject to a preferential tax rate of 15% on their gross income. Since the Bank established its Headquarters in Manila and has established and continues to establish branches or "missions" throughout the region, it can be considered in the same footing as a regional or area headquarters of multinational companies. In this way, the objective of the law which is to equalize the enjoyment of the preferential tax rate accorded to an alien manager of an R/AH or ROH with a Filipino who is in the same R/AH or ROH may likewise, be extended to Filipino Bank staff so as to remove the disparity with respect to the tax rate being imposed on income being received by those Filipinos. Such being the case, Filipinos employed and are occupying managerial or technical positions as those of aliens employed by the Bank which is not only a Regional or Area Headquarters, but the Headquarters itself are subject to the preferential tax rate of 15% on their gross compensation income pursuant to Section 25(C) of the Tax Code of 1997. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue