Regional Operating Headquarters Not a Management and Technical Consultant under RR 2-98

September 18, 2001 BIR RULING NO. 040-01 Sec. 28 (A) (6) 000-00 Baniqued & Baniqued ATTORNEYS AT LAW Suite 803, 8/F Jollibee Centre, San Miguel Avenue Ortigas Center, Pasig City Attention: Attys. Carlos G. Baniqued and Terence Conrad H. Bello Gentlemen : This refers to your letter dated January 15, 2001 requesting on behalf of your client, Coca Cola Far East Limited ("CCFEL"), for confirmation that a regional operating headquarters ("ROHQ") is not a "management and technical consultant" contemplated by Section 2.57.2 of Revenue Regulations No. 2-98 (otherwise known as the "Withholding Tax Regulations"), as amended by Revenue Regulations 6-2001, hence, income payments made to a ROHQ for qualifying services rendered by it as such are not subject to the 5% (now 10%) creditable withholding tax ("CWT"). It is represented that CCFEL is a multinational company organized and existing under the laws of Hongkong; that it is licensed to operate a ROHQ in the Philippines pursuant to E.O. No. 226, otherwise known as the "Omnibus Investments Code of 1987, as amended by R.A. No. 8756; that as a ROHQ, CCFEL is permitted to engage only in certain enumerated activities, specifically, it is authorized to render any of the following qualifying services for the benefit exclusively of its affiliates, branches or subsidiaries, viz: (a) General administration and planning; (b) Business planning and coordination; (c) Sourcing procurement of raw materials and components; (d) Corporate finance advisory services; (e) Marketing control and sales promotion; (f) Training and personnel management (g) Logistics services; (h) Research and development services and product development; (i) Technical support and maintenance; (j) Data processing and communication; and (k) Business development. that CCFEL renders certain qualifying services enumerated above to its affiliate, the Coca-Cola Export Corporation ("TCCEC"), a resident foreign corporation maintaining a branch office in the Philippines; and that in consideration for such services. TCCEC reimburses CCFEL for expenses incurred by the latter in providing the qualifying services plus a certain percentage mark-up on cost. In reply, please be informed that pursuant to Section 2.57.2(B) of Rev. Regs. No. 2-98, income payment to juridical persons for services rendered as "management and technical consultants" are subject to the five percent (5%) (now 10% as amended by Rev. Regs. No. 6-2001)CWT. Section 22 (EE) of the 1997 Tax Code qualifies " ROHQ as 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 or 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." Further, Article 58(b)(1), E.O. No. 226, as amended by RA 8756, specifically identifies ROHQ as an entity which is permitted to perform only certain qualifying services as enumerated above. It is also prohibited from offering qualifying services to entities other than its affiliates, branches or subsidiaries, as specified in its registration with the Securities and Exchange Commission (SEC). Furthermore, ROHQs cannot participate in any manner in the management of any subsidiary or branch that they may have in the Philippines. On the other hand, "management and technical consultants" normally render services to various unrelated parties. These entities are engaged to supervise, direct and control the management and operation of other companies. (Anscor Container Corp. v. CIR. C-G.R. SP No. 22912, March 21, 1991; PBP Financing and Leasing Corporation v. CTA, CA-G.R. SP No. 35853, November 26, 1997; Premier Hotels and Resorts Mgt., Inc., v. CIR CTA Case No. 4978 and 5089, July 23, 1998; and LMG Chemicals Corp. v. CIR, CTA Case No. 5300, Feb. 2, 2000). In these cases, management fees paid by the managed company to the managing company were denominated as income payments made to "management and technical consultants", hence subject to 5% (now 10%) CWT. In the light of your representation that CCFEL is merely a ROHQ as it is permitted by law to perform only certain qualifying services for the benefit of its affiliates, branches and subsidiaries such as those enumerated above, this Office is of the opinion that the imposition of the 5% (now 10%) CWT will not apply to them. Moreover, the 5% (now 10%) CWT for services rendered as "management and technical consultants" is deducted and withheld from gross fees or gross payments which in all probability, will exceed the income tax liability of the ROHQ. It is noted that ROHQs are entitled to a reduced tax rate of 10% based on their net income. On this basis, this Office further opines that the 5% (now 10%) CWT ordinarily imposed on management and technical consultants, if applied to ROHQs, such as CCFEL, will result in a situation where the preferential income tax rate granted to them is effectively negated or rendered meaningless. The imposition of the 5% (now 10%) CWT is patently and grossly disproportionate to the tax due from, or payable by, ROHQs on such income derived from their rendition of certain qualifying services to their affiliates, branches or subsidiaries. Considering the foregoing, your opinion that CCFEL, as a ROHQ rendering the above enumerated qualifying services exclusively to its affiliates, branches or subsidiaries, is not subject to the 5% (now 10%) CWT imposed under Sec. 2.57(B) of Rev. Regs. No. 2-98, as amended by Rev. Regs. 6-2001 is hereby confirmed. Finally, the tax liability of CCFEL shall be computed in accordance with Section 28(A)(6)(b) of the 1997 Tax Code. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) RENE G. BAEZ Commissioner of Internal Revenue