BIR Ruling No. 346-11

September 28, 2011 BIR RULING NO. 346-11 Angara Abello Concepcion Regala & Cruz Law Offices 22/F ACCRA Law Tower 2nd Avenue corner 30th Street Crescent Park West, Bonifacio Global City Taguig 0399 Attention: Ruby Rose J. Yusi Gentlemen : This refers to your letters dated November 11, 2010 and January 31, 2011 requesting on behalf of your client, S.C. JOHNSON PHILIPPINES ROHQ, for the confirmation of your opinion that the provisions of Revenue Regulations No. 11-2010 will not be applied retroactively to its 2010 income of the Filipino executives who have relied in good faith on BIR Ruling Nos. DA-(ECB-009) 569-2008 and DA (ECB-017) 327-2009 issued on December 25, 2008 and June 25, 2009, respectively. It is represented that S.C. JOHNSON PHILIPPINES ROHQ obtained BIR Ruling Nos. DA-(ECB-009) 569-2008 dated December 25, 2008 and DA (ECB-017) 327-2009 dated June 25, 2009 confirming that the managerial and technical positions occupied by both alien executives and Filipinos are entitled to the fifteen percent (15%) preferential rate. On the basis of the said BIR Rulings, S.C. JOHNSON PHILIPPINES ROHQ applied the 15% preferential tax for the Filipino executives who have applied of the option to be taxed at 15%. Based on the foregoing, you submit that Revenue Regulations No. 11-2010, which amends the guidelines on the availment of the 15% preferential tax rate by qualified Filipinos employed by ROHQs and RHQs, cannot be made to apply to the 2010 income of the Filipino executives who, following the aforementioned BIR Rulings have opted to be subject to the 15% preferential tax rate and that to allow the retroactive application of RR 11-2010 to income received in 2010 would be in violation of Section 246 of the Tax Code of 1997, as amended, as the said regulation was published in the newspapers on October 28, 2010 but shall cover compensation payments made from January 1, 2010 under Section 9 thereof. In reply, please be informed that the application of Revenue Regulations (RR) No. 11-2010 to the compensation payments made by S.C. JOHNSON PHILIPPINES ROHQ to the Filipino executives in 2010 is not in violation of the principle of Non-Retroactive Application of Tax Laws under Section 246 of the Tax Code of 1997, as amended, since there is no retroactivity to speak of. The provision under Section 9 (a) of RR No. 11-2010 providing that it shall cover compensation payments made from January 1, 2010 prior to its effectivity date of October 28, 2010, does not connote retroactivity of the said regulation but rather it adheres to the general principle that income tax is imposed on the taxable income derived for each taxable year under Section 24 (A) (1) of the Tax Code of 1997, as amended. The gross taxable compensation income received from the employer shall be determined at the end of the taxable year and shall deduct and withhold a tax in an amount equal to the tax due on the employee's compensation income for the entire year. Thus, applying the provisions of RR No. 11-2010 to compensation income received by the employees from January 1, 2010 does not result to retroactivity. RR No. 11-2010 provides that in the event that a qualified Filipino personnel employee by a Regional Headquarters or Regional Operating Headquarters holding managerial or technical positions would receive an annual compensation above the threshold criteria and opted to be withheld at the rate of 15% of his gross income at the start of the year but at the end of the year becomes subjected to regular income tax rates, the employer shall make the necessary adjustments at the end of the year. Thus, there is no violation of Section 246 of the Tax Code of 1997, as amended, as there was no interest or right prejudiced by the application of RR No. 11-2010. However, in order for the Filipino executive be entitled to such adjustment on his compensation income, RR No. 11-2010 is explicit that the determination of whether or not the employee qualifies for the final withholding tax rate of 15% shall be made on a yearly basis. Hence, in order for a final withholding tax equivalent to 15% be withheld from compensation received from January 1, 2010 to December 31, 2010 by its Filipino executives holding managerial or technical positions, S.C. JOHNSON PHILIPPINES ROHQ must first comply with the requirements under Section 7 of RR No. 11-2010. 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue