Regional or Area Headquarters Not Subject to Income Tax and Value-added Tax

September 28, 2001 BIR RULING NO. 047-01 KPMG Laya Mananghaya & Co. 22/F Antel 1000 Corporate Centre 139 Valero Street, Salcedo Village Makati City Attention: Atty. Francisco G. Tagao Principal Tax & Corporate Services Gentlemen : This refers to your letter dated October 25, 2000 stating that your client, Caltex (Asia) Limited (CAL), is a foreign corporation organized under the laws of Delaware, USA, and is engaged in the petroleum business and other allied business activities; that it has a number of subsidiaries, affiliates and branches within the Asia-Pacific Region, particularly in Hong Kong, Malaysia, the Philippines, Singapore, Japan and Thailand; that in order to maximize efficiency within the Asia-Pacific Region, CAL intends to establish a regional headquarters (RHQ) in the Philippines pursuant to the provisions of Republic Act (R.A.) No. 8756 to supervise, communicate and coordinate the fiscal operations of the Caltex Operating Companies (COCs) within the region, which fiscal operations include accounting and treasury policies, and internal audit functions, relative to the monitoring of receivable and payable accounts, insurance coordination, investments, payroll, and tax accounting, materials and supplies requisitioning, financing and banking activities, cash flow analysis and borrowings; that CAL RHQ will also support the operating companies on information technology by coordinating plans design, programming, installation, maintenance and technical support, that it will also supervise, coordinate and communicate policies on human resource management which human resource policies include selection and engagement policies, training, compensation and benefit development, salary administration, collective bargaining policies, expatriate services and employee communication; and, as stated in your letter to the Securities and Exchange Commission (SEC), in performing CAL RHQ's proposed functions of superintending, guiding and overseeing the activities of the COCs within the region, CAL RHQ will not participate directly in the execution of the work or activities necessary to implement said policies and objectives. Moreover, it is represented that in performing the above mentioned activities, CAL RHQ will not derive any income in the Philippines except for the US$50,000.00 annual inward remittance required by law as assigned by the Head Office and the amounts which are billed against the COCs over and above the US$50,000.00 which CAL RHQ will collect from the COCs reimbursement for the share of allocated cost of maintaining its operation in the Philippines as a supervisory, communication and coordination center for its affiliates operating within the Asia-Pacific Region. We understand that the SEC, in an opinion dated October 20, 2000, confirmed that the activities to be performed by CAL RHQ in the Philippines can be deemed as supervisory, communication and coordinating activities of an RHQ and that since CAL RHQ shall not derive any income from such activities and will not participate in the management of any of its subsidiaries and affiliates, its intended office can be an RHQ. You further represented in your July 31, 2001 supplemental memorandum that CAL has an existing regional operating headquarters (ROHQ) in the Philippines which will be retained to perform activities more suitable and appropriate to an ROHQ. Based on the foregoing representations, you now request confirmation of your opinion that 1. The RHQ to be established by CAL in the Philippines in performing the functions as described in the preceding paragraphs is exempt from income tax pursuant to Article 64 of R.A. 8756 as well as Section 13 of the Implementing Regulations and Section 28 (A)(6) of the Tax Code of 1997; 2. Said RHQ to be established by CAL shall not be subject to VAT since it does not derive any income except for the annual inward remittance by the Head Office and other amounts as described and limited in the preceding paragraphs. Moreover, Section 64 of the Omnibus Investments Code, as amended by R.A. 8756, and Section 109 (p) of the Tax Code of 1997 exempt an RHQ from VAT. In addition, sale or lease of goods and property and the rendition of services to the RHQ shall be subject to zero percent (0%) VAT pursuant to Article 65 of the law and Section 14 of the Implementing Regulations. 3. Filipino employees of said RHQ occupying the same positions as those aliens employed by multinational companies are entitled to the preferential 15% tax regardless of whether or not there in an alien executive occupying the said position. In reply thereto, please be informed that 1. 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 defines the term "regional or area headquarters" as "a branch 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 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. Such being the case, since the activities of the CAL RHQ in the Philippines shall be limited to acting as supervisory, communications and coordinating center of its branches, subsidiaries and affiliates in the Asia-Pacific Region, without deriving any income therefrom and will not participate in the management of any of its subsidiaries or affiliates, as confirmed by the SEC in its letter dated October 22, 2000, said activities fall within the definition of regional headquarters as defined in Section 22(DD) of the Tax Code of 1997. It must be noted that for tax purposes, the proposed RHQ, 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 ROHQ pursuant to Section 4(b)(1) of the Rules and regulations implementing R.A. No. 8756. On the basis of the foregoing, it must be stressed that in performing CAL RHQ's proposed functions of superintending, guiding and overseeing the activities of the COCs within the region, CAL RHQ shall not participate directly in the execution of the work or activities necessary to implement said policies and objectives. For allowing the same would be permitting indirectly what is prohibited directly. Accordingly, the RHQ to be established by CAL will not be subject to income tax (BIR Ruling No. 053-2000 dated October 30, 2000), as long as its billing to COCs will not include any fees or compensation paid to RHQ for services rendered or performed but more of reimbursement of their share in the allocated RHQ expenses, otherwise, it shall be taxable as ROHQ. Provided, further, that there would be no excess of the amount received from the COC's for the costs of operating the RHQ as it costs will be shared among the COC's and therefore should not result in any income. 2. Section 109 (p) of the Tax Code of 1997 provides that services rendered by regional or are headquarters established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and which do not earn or derive income from the Philippines shall be exempt from value added tax. In relation thereto, Section 14 of R.A. 8756 provides that regional or area headquarters shall be exempted from the value added tax. The sale or lease of goods and property and the rendition of services to regional or area headquarters shall be subject to zero percent (0%) VAT rate as provided for in the National Internal Revenue Code, as amended. Accordingly, the activities of the proposed RHQ to be established by CAL shall be exempt from VAT pursuant to Section 109 (p) of the Tax Code of 1997. On the other hand, sale or lease of goods and property and the rendition of services to the RHQ shall be subject to zero percent (0%) VAT pursuant to Section 14 of R.A. 8756. 3. 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 and that the same tax treatment is applicable to Filipinos employed and occupying the same positions as those aliens employed by multinational companies, 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 of 1997 pursuant to Article 61 of Executive Order No. 226, as amended by Section 5 of R.A. 8756. Such being the case, Filipino employees of the proposed RHQ occupying managerial and technical positions equivalent to alien executives will be subject either to the preferential tax of 15% or to the regular tax rate based on their taxable income in accordance with the tax table under Section 24 (A)(1)(c) of the Tax Code of 1997, regardless of whether there is an alien executive occupying the same position. This is a deviation from BIR Ruling No. 147-98 dated October 16, 1998 to the effect that the preferential tax treatment shall apply in cases where concurrently an alien holds a position similar to that of the Filipino employee. It is of course understood that your client's books of accounts and other pertinent records shall be subject to periodic examination by revenue enforcement officers of this Bureau for the purposes of ascertaining whether you have been complying with the conditions under which you have been granted tax exemption or tax incentives and your 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 disclosed that the facts are different, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. Very truly yours, (SGD.) RENE G. BAEZ Commissioner of Internal Revenue