Department of Environment and Natural Resources

March 9, 2018 ITAD BIR RULING NO. 035-18 Sections 25 (C) and 22, Tax Code Department of Environment and Natural Resources Visayas Avenue, Diliman, Quezon City, 1100 Gentlemen : This refers to your 1 July 2016 Acknowledgement Receipt of a letter dated 12 May 2016 with the subject: "Letter DTD 5-12-2016 RE: Request for Clarification to Whether Local Nationals Employed by Partnership on Environmental Management for Seas of East Asia (PEMSEA) are Qualified to Avail of the Preferential Tax Rate of Fifteen percent (15%) on Gross Compensation Income." Research shows that PEMSEA is an intergovernmental organization operating in East Asia to foster and sustain healthy and resilient oceans, coasts, communities and economies across the region; that the Philippines has hosted PEMSEA since 1993 by providing the use of land, equipment as well as other services and facilities to PEMSEA as the Philippines' contribution to the enhancement of sustainable coastal development in the region; that the Philippine Government granted PEMSEA the use and sole occupancy of the Headquarters Seat inside the Department of Environment and Natural Resources (DENR) compound in Quezon City; and that the Philippines recognizes the international legal personality of PEMSEA pursuant to the Agreement between the Government of the Republic of the Philippines and the Partnerships in Environmental Management for the Seas of East Asia (PEMSEA) Establishing the PEMSEA Resource Facility Center (PEMSEA Headquarters Agreement), signed on 31 July 2012, ratified on 22 November 2013, and concurred to by the Senate in a Resolution adopted on 25 May 2015. AcICHD In reply, please be informed that Section 25 (C) of the National Internal Revenue Code of 1997, as amended (Tax Code) provides that: " SEC. 25. Tax on Nonresident Alien Individual. xxx xxx xxx (C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area headquarters and regional operating headquarters, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by these multinational companies. For purposes of this Chapter, the term ' multinational company ' means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets ." (Emphasis ours) In connection thereto, Section 22 of the Tax Code provides for the definition of 'regional or area headquarters' (RHQs) and 'regional operating headquarters' (ROHQs). It provides: "SEC. 22. Definitions. When used in this Title: (DD) The term ' regional or area headquarters ' shall mean 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 Region and other foreign markets. (EE) The term ' regional operating headquarters ' shall mean a branch established in the Philippines by multinational companies which are engaged in any of the following services: general administration and planning; business planning and coordination; sourcing and procurement of raw materials and components; corporate finance 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 communications; and business development. xxx xxx xxx" Based on the above provisions, alien individuals and Filipinos (occupying the same position as the aliens), employed by RHQs and ROHQs established in the Philippines by multinational companies are subject to the preferential tax of fifteen percent (15%) on their gross income. Considering that PEMSEA is a Philippine recognized international organization comprised of governments in the East Asia, and is not registered as RHQ or ROHQ established by a multinational company in the Philippines, this Office is of the opinion that the Filipinos working in PEMSEA cannot qualify for the 15% preferential tax rate provided for under Section 25 (C) of the Tax Code. Accordingly, PEMSEA's Filipino employees shall be taxed at the regular income tax rate on taxable compensation income under Section 24 of the Tax Code. In addition thereto, since PEMSEA is an international organization exempt from the duty to withhold on compensation of its Filipino employees under Section 2.78.1 (B) (5) of Revenue Regulations No. 2-98, and is also exempt from the application of Tax Identification Number under Executive Order No. 31, 1 its Filipino employees shall individually file their tax return and pay taxes at the BIR Revenue District Office where they are registered. Please be guided accordingly. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. Amending Executive Order No. 98 dated April 28, 1999 by Exempting therefrom Diplomatic Missions and international Organizations as well as their Accredited Foreign Personnel.