BIR Ruling No. 433-13

November 14, 2013 BIR RULING NO. 433-13 Secs. 22 (DD); 28 (A) (6) (a); 25 (C); 108 (B) (3); 109 (1) (J), NIRC; E.O. No. 226 as amended by R.A. No. 8756; BIR Ruling No. 047-01; BIR Ruling No. 024-02; BIR Ruling No. 596-12 Leonardo Vicente & Associates Unit 55 Zeta II Building, 191 Salcedo St. Legaspi Village, Makati City Attention: Mr. Edgardo A. Leonardo Managing Partner Gentlemen : This refers to your letter dated March 16, 2010, requesting, on behalf of your client, ACS PACIFIC LIMITED ("ACS"), opinion on the tax implications on the operation of the corporation as a Regional Headquarters. It is represented that ACS, with Taxpayer Identification No. 005-038-485-000, is a limited liability company organized and existing under the laws of Hongkong; that it is engaged in the business of international trade; that it is registered as a Regional Headquarters with the Securities and Exchange Corporation (SEC) under SEC Registration No. F-1997-00018 dated February 4, 1997; that the activities of ACS are limited to acting as supervisory, communications and coordinating center for its affiliates, subsidiaries or branches in the region; that it intends to import motor vehicles which are needed and to be used solely for its functions as regional headquarters; that the regional headquarters will not derive any income from sources within the Philippines and will not participate in any manner in the management of any subsidiary or branch office the foreign entity might have in the Philippines; and that the request was filed to obtain confirmation on the following opinions: 1.ACS, as a regional headquarters in the Philippines, is exempt from income tax on fees derived from rendering services for its affiliates pursuant to Article 64 of R.A. 8756; 2.The sale or lease of goods and property (such as rentals for office space and the purchase of motor vehicles from local dealers) as well as rendition of service to Regional Headquarters is subject to zero percent (0%) value-added tax (VAT); DcSACE 3.The importation of motor vehicles from abroad is exempt from VAT; 4.The corporation is entitled to a refund in the event that it pays the VAT on the importation of motor vehicle in the absence of a BIR Ruling pending its application. In reply, please be informed as follows: 1. Exemption from corporate income tax 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 defined the term "regional or area headquarters" as "a branch established in the Philippines by multi-national companies and which headquarters do not earn or derive income from the Philippines and which act as a supervisory, communications and coordinating center for their affiliates, subsidiaries or branches in the Asia-Pacific Regional and other foreign markets." Likewise, Article 64 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. (BIR Ruling No. 047-01 dated September 28, 2001) In BIR Ruling No. 596-2012 dated October 25, 2012 , this Office held that: "It must be noted that for tax purposes, a regional or area headquarters, 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; ACTESI Data processing and communication; and business development, which functions are applicable to a Regional Operating Headquarters pursuant to Section 4(b) of the Rules and Regulations implementing R.A. No. 8756. Accordingly, World Vision International, a regional headquarters in the Philippines is not subject to income tax as long as in performing its functions and in acting as a supervisory, communications and coordinating center for its affiliates in the region, it shall not render any of the foregoing qualifying services. Otherwise, it shall be taxed as a Regional Operating Headquarters." Accordingly, ACS' regional headquarters will not be subject to income tax as long as in performing its functions and in acting as a supervisory, communications and coordinating center for its affiliates in the region, it shall not render any of the foregoing qualifying services, otherwise, it shall be taxed as a Regional Operating Headquarters. (BIR Ruling No. 596-2012 dated October 25, 2012; BIR Ruling No. 024-02 dated June 21, 2002) 2. Zero Rated VAT on Sale or Lease of Goods or Services to the RHQ In turn, Article 65 of E.O. No. 226, as amended by R.A. No. 8756, provides, viz. : "Art. 65. Value-Added Tax . The regional or area headquarters established in the Philippines by multinational companies shall be exempted from value-added tax. In addition, 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." In this case, it is clear from Article 65 of the E.O. No. 226, as amended, that regional or area headquarters are exempt from VAT and that the sale or lease of goods or properties to them are subject to the zero-percent (0%) VAT rate. Such being the case and since the said Executive Order is a special law, the sale of goods and services rendered to ACS shall be effectively subject to the zero-percent (0%) VAT rate. (BIR Ruling No. 047-01 dated September 28, 2001) 3. VAT on importation of motor vehicles Article 67 of E.O. No. 226, as amended by Republic Act (R.A.) No. 8756, An Act Providing for the Terms, Conditions and Licensing Requirements of Regional or Area Headquarters, Regional Operating Headquarters, and Regional Warehouses of Multinational Companies, Amending for the Purpose Certain Provisions of Executive Order No. 226, otherwise known as The Omnibus Investments Code of 1987, provides as follows, viz. : STaIHc "Art. 67. Tax and Duty Free Importation of Training Materials and Equipment, Importation of Motor Vehicles . Regional or area headquarters and regional operating headquarters shall enjoy tax and duty free importation of equipment and materials for training and conferences which are needed and used solely for their functions as regional or area headquarters or regional operating headquarters and which are not locally available subject to the prior approval of the Board of Investments. "The sale or disposition of equipment within two (2) years after importation, entered tax and duty free, shall require prior approval of the Board of Investments and prior payment of applicable taxes and duties waived in favor of RHQ/ROHQ. " Regional or area headquarters and regional operating headquarters shall be entitled to the importation of new motor vehicles subject to the payment of the corresponding taxes and duties. " (Emphasis supplied) It is clear from the foregoing provision that regional headquarters shall enjoy tax and duty free importation of equipment and materials for training and conferences which are needed and used solely for their functions as regional or area headquarters or regional operating headquarters and which are not locally available subject to the prior approval of the Board of Investments. In so far as the importation of new motor vehicles, it is expressly provided that regional or area headquarters are entitled to import but subject to corresponding taxes, including VAT. 4. As to Entitlement to Refund VAT Paid on Importation of Motor Vehicles Since the importation of new motor vehicles by regional or area headquarters is subject to VAT, there is no legal basis for the entitlement of a refund of VAT paid on such importation notwithstanding the absence of a BIR ruling on the issue. Finally, it is understood that ACS's books of accounts and other pertinent records shall be subject to periodic examination by revenue enforcement officers of this Bureau for the purpose of ascertaining whether ACS is complying with the conditions under which it is granted tax exemption or tax incentives and its tax liability, if any, pursuant to Section 235 of the 1997 Tax Code. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. DcITHE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue