Deductibility of Regional Management Fees in Computing Taxable Income

June 22, 1999 BIR RULING NO. 079-99 000-00-079-99 Punong Bayan & Araullo 6th Floor, Vemida IV Building Alfaro Street, Salcedo, Village Makati City Attention: Atty . H . D . Tingson, Jr . Tax Principal Gentlemen : This refers to your letter dated April 15, 1998 stating that your client, Kuehne & Nagel (Philippines), Inc., is a domestic corporation organized under the laws of the Philippines with principal office address at Unit 5 & 6 Columbia Complex II, 707 Ninoy Aquino Avenue, Paraaque, Metro Manila; that it is engaged in freight forwarding, customs brokerage, consultancy and advisory services in transport collection and delivery services, overseas transport and port services, trade fairs and exhibition transport, stevedoring, worldwide transport and similar services; that it is a subsidiary of Kuehne and Nagel (Asia Pacific) Holding AG; that since the nature of the business of Kuehne & Nagel (Philippines), Inc. requires extensive regional and international connections, like most multi-national companies, routine non-technical day-to-day administration services are provided within the Kuehne & Nagel Group worldwide by central and regional offices; that as it is not practical or economical to provide these services in each country, they are therefore provided on a centralized basis; that with this arrangement, the subsidiary enters into an agreement with its regional headquarter for reimbursement on a monthly basis, of routine non-technical day-to-day administration expenses incurred by the headquarters in providing the services, and that the calculation of the amount to be reimbursed will include reference to actual expenses incurred by the headquarters directly applicable to Kuehne & Nagel (Philippines), Inc., and a proportion of the actual routine non-technical day-to-day administration expenses incurred by the headquarters in rendering the service. In connection therewith, you now request for a ruling as to whether or not the Regional Management Fees paid by Kuehne & Nagel (Philippines), Inc. qualifies as a tax deductible item in computing its net income subject to income tax. LLjur In reply, please be informed that all ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession are deductible from gross income pursuant to Section 34(A)(1)(a) of the Tax Code of 1997. Expenses which are "ordinary and necessary" generally contemplate expenses which are directly connected with and proximately resulting from carrying on the business and must be shown to be appropriate and helpful in the development of the taxpayer's business for the acquisition or pursuit of income or profit. (Gancayco vs. CIR, 1 SCRA 980) Considering that the Regional Management Fees paid by Kuehne & Nagel (Philippines), Inc. to the central headquarters is directly connected with and proximately resulting from carrying on the business of Kuehne & Nagel (Philippines), Inc. and are appropriate and helpful in the development of its business, the said Regional Management Fees falls within the contemplation of ordinary and necessary expenses under Section 34(A)(1)(a) of the Tax Code of 1997. (BIR Ruling No. 085-89 dated April 26, 1989) In view thereof, this Office is of the opinion that, subject to the test of reasonability and to the usual substantiation requirements, the Regional Management Fees paid by Kuehne & Nagel (Philippines), Inc. to the central headquarters is a deductible item in computing the taxable income subject to income tax, pursuant to Section 34(A)(1) 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, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue