Application of Sec. 25 (D) of the Tax Code of 1997 Re: Tax Treatment of Filipinos Employed by Offshore Banking Units

October 16, 1998 BIR RULING NO. 147-98 25 (D) 24 (A) (1) (c)-000-00-147-98 Romulo Mabanta Buenaventura Sayoc & De Los Angeles ATTORNEYS-AT-LAW 30thFloor, Citibank Tower Citibank Plaza, 8741 Paseo de Roxas Makati City Attention: Atty . Reynaldo G . Geronimo Gentlemen : This refers to your letter dated July 29, 1998 requesting on behalf of your client, the Offshore Banker's Association of the Philippines, for a clarificatory ruling on the application of the proviso of Section 25(D) of the Tax Code of 1997 that " Provided , however , That the same tax treatment shall apply to Filipinos employed and occupying the same [managerial or technical] position as those of aliens employed by these offshore banking units." prcd It is represented that the managerial or technical positions held by expatriates or non-resident aliens in Offshore Banking Units ("OBU") belong to the category of positions known as "top management"; that to these positions are attached the executive functions of, subject to the control and supervision of higher authorities in the Bank abroad, making the major plans and policies for the OBU and to formulate the major decisions affecting such matters as finance, treasure, marketing, research, operations, product development, external relations and similar high level activities; that the top positions go by such names as "General Manager", "Branch Manager", "Country Head", "Senior Country Officer", "Country Manager", "OBU Manager", "Chief Executive Officer" and their deputies, who are one rank below in the line organizational chart, are known as "Head of _____" pertaining to the different major departments, such as Credit, Operations, Correspondent Banking, Private Banking, Treasury, Financial Institutions, Financial Management, Finance, Marketing, Human Resources, Corporate Finance, Compliance and Audit, Special Projects, Correspondent Banking, or as Deputy/Assistant Manager for ______; that their ranks are usually Vice President and above; and that you are of the opinion that "(1) Filipinos who are employed and hold such managerial or technical positions are subject to the 15% final withholding tax on their gross income consisting in salaries, wages, annuities, compensation, remuneration and other emoluments such as honoraria and allowances, received from their respective employers who are offshore banking units, and not to the tax rates in the schedule ranging from 5% to 34% found in Section 24(A) of the Tax Code. "(2) Same rule applies even if the said Filipinos are the only ones so employed by an OBU for the time being. Thus, assuming the second level of top management in an OBU consists of only two positions, namely, the Head of Operations and Head of Marketing, the Head of Operations being an expatriate and the Head of Marketing a Filipino, the Filipino Head of marketing shall continue to be subject to the said 15%., even after the expatriate Head of Operations is recalled to the Head Office or reassigned outside of the country. "3) If, in the example given in the immediately preceding paragraph, a Filipino is employed to replace the expatriate Head of Operations, such that the only two positions in the second level of top management are both held by Filipinos, still, the two Filipinos who are lead of Operations and Head of Marketing, respectively, are subject also to the said 15% final withholding tax." In reply, please be informed that pursuant to above-cited proviso of Sec. 25(D) of the Tax Code of 1997, i.e., " Provided , however , That the same tax treatment shall apply to Filipinos employed and occupying the same [managerial or technical] position as those of aliens employed by these offshore banking units." Filipinos employed and are occupying managerial or technical positions as those of aliens employed by the OBU's are subject to a preferential tax rate of 15% on their gross compensation income. Clearly, the rationale for this proviso is to equalize the enjoyment of the preferential tax rate accorded to an alien manager of an OBU with a Filipino who is occupying a similar position in the same OBU. However, the preferential tax treatment shall apply only in cases where concurrently an alien holds a position similar to that of the Filipino employee. The objective of the law to equalize the tax treatment of an alien and a Filipino is no longer applicable in a situation where there is no alien employed. Furthermore, this preferential tax treatment shall not apply where the counterpart expatriate is recalled to the head office or reassigned elsewhere, whether temporarily or otherwise, and only Filipinos are the ones so employed by an OBU for the time being. The same answer obtains where the post vacated by the expatriate is subsequently assumed by a Filipino to replace the expatriate and as a result of which all top management posts are now being occupied by Filipinos. Therefore, this Office hereby holds that in all instances where there is no expatriate present and working in the establishment, there being no disparity to speak of with respect to the tax rate imposed under Sec. 24 (A)(1)(c) 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 shall be disclosed that the facts are different, then this ruling shall be considered null and void. prLL Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue