ITAD BIR Ruling No. 109-12

February 28, 2012 ITAD BIR RULING NO. 109-12 Article 10, Philippines-Germany tax treaty Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Alexander B. Cabrera Managing Partner, Tax Services Gentlemen : This refers to your letter dated October 23, 2008, on behalf of Evonik Steag GmbH-Philippine Regional Operating Headquarters ("Evonik ROHQ"), requesting confirmation that branch profits remitted by Evonik ROHQ to the head office of Evonik Steag Gesellschaft mit beschrankter Haftung ("Evonik GmbH") (formerly Steag Aktiengesellschaft) in Germany are subject to income tax at the preferential rate of 10 percent pursuant to the Agreement between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital ("Philippines-Germany tax treaty"). It is represented that Evonik GmbH is a corporation organized and existing under the laws of Germany and is a resident of Germany based on the Certificate of Fiscal Residence issued by the Tax Authority of Essen-Sud of Germany on April 25, 2008; that Evonik GmbH is located at Rellinghauser Strasse 1-11,45128 Essen, Germany; that Evonik GmbH is licensed by the Securities and Exchange Commission (" SEC ") to establish a regional operating headquarters in the Philippines to engage in general administration and planning, business planning and coordination, corporate finance and advisory services, and marketing control and sales promotion, based on the Certificate Registration and License issued on February 11, 2004, as amended on June 27, 2008; that the regional operating headquarters in the Philippines of Evonik GmbH is registered under SEC Registration No. A200400011; and that Evonik ROHQ, being the regional operating headquarters concerned, is located at Barangay Villanueva, Misamis, Oriental, Philippines. It is further represented that on April 3, 2009, the Board of Directors of Evonik GmbH approved the remittance of profits accumulated by Evonik ROHQ as of December 31, 2008, amounting to Php61,474,076.00, on or before December 31, 2009, as certified by the Resident Agent and Manager of Evonik ROHQ on May 20, 2009. EDATSI Finally, it is represented that the branch profits subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal of the taxpayers involved based on the Certificate issued by the same Resident Agent on August 19, 2008. In reply, please be informed that Republic Act No. 8756 (R.A. 8756), amending certain portions of Executive Order No. 226 (E.O. 226) (otherwise known as the Omnibus Investments Code of 1987) defines regional or area headquarters (RHQ) and regional operating headquarters (ROHQ) as follows: "SEC. 2. Definition of Terms. For purposes of this Act, the term: "xxx xxx xxx "2) Regional or Area Headquarters (RHQ) shall mean an office whose purpose is to act as an administrative branch of a multinational company engaged in international trade which principally serves as a supervision, communications and coordination center for its subsidiaries, branches or affiliates in the Asia-Pacific Region and other foreign markets and which does not earn or derive income in the Philippines; and "3) Regional Operating Headquarters (ROHQ) shall mean a foreign business entity which is allowed to derive income in the Philippines by performing qualifying services to its affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific Region and in other foreign markets. Based on the foregoing, it is clear that as distinguished from an RHQ, which does not earn or derive income in the Philippines, an ROHQ is allowed to derive income in the Philippines by performing qualified services to its affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific Region and in other foreign markets, which income shall be taxed in accordance with Article 64 of E.O. 226, as amended by R.A. 8756, as follows: "Art. 64. Corporate Income Tax Incentive to Regional or Area Headquarters and Regional Operating Headquarters. Regional or area headquarters 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 centers for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets shall not be subject to income tax. Regional operating headquarters shall be subject to a tax rate of ten percent (10%) of their taxable income as provided for under the National Internal Revenue Code, as amended by Republic Act No. 8474: Provided, That any income derived from Philippine sources by the ROHQ when remitted to the parent company shall be subject to the tax on branch profit remittances as provided for in Section 28(A)(5) of the National Internal Revenue Code." ISaCTE Consistent with the provisions of E.O. 226, as amended by R.A. 8756, Section 28 (A) (6) (b) of the Tax Code of 1997 provides for a tax at the rate of ten percent (10%) based on taxable income of ROHQs. In addition, the applicable branch profit remittance tax (BPRT) rate for income remittances is specified under Section 28 (A) (5) of the same Code which provides: "Section 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (A) Tax on Resident Foreign Corporation. xxx xxx xxx (5) Tax on Branch Profits Remittances. Any profit remitted by a branch to its head office shall be subject to a tax of fifteen (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: provided, that interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines." However, such profits may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines. Section 32 (B) (5) of the Tax Code provides: "B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this title: (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." With respect to a treaty, what you invoke is the Philippines-Germany tax treaty. Paragraph 6, Article 10 thereof provides: AcCTaD "Article 10 DIVIDENDS xxx xxx xxx 6. Where a resident of the Federal Republic of Germany has a branch in the Republic of the Philippines, this branch may be subject to a branch profit remittance tax withheld at source in accordance with Philippine law. However, the tax so charged shall not exceed 10% per cent of the gross amount of the profits remitted by that branch to the head office. xxx xxx xxx" Based on the above quoted provision, branch profits remitted by the branch in the Philippines of a German enterprise to its head office in Germany may be taxed in the Philippines at a rate not to exceed 10 percent of the gross amount profits. In view thereof, branch profits to be remitted by Evonik ROHQ to the head office of Evonik GmbH in Germany are subject to income tax at a reduced rate of 10 percent of the gross amount thereof, pursuant to paragraph 6, Article 10 of the Philippines-Germany tax treaty. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue