ITAD BIR Ruling No. 113-13

April 15, 2013 ITAD BIR RULING NO. 113-13 Section 23 (A), 1997 NIRC; Section 45, ADB Headquarters Agreement Asian Development Bank 6 ADB Avenue, Mandaluyong City Gentlemen : In BIR Ruling No. 029-99, dated 11 March 1999, this Bureau had the occasion to rule on the tax rate applicable on salaries and emoluments paid by the Asian Development Bank (ADB) to its Filipino officers and bank staff. The dispositive portion of the said Ruling reads: "Since the Bank established its Headquarters in Manila and has established and continues to establish branches or "missions" throughout the region, it can be considered in the same footing as a regional or area headquarters of multinational companies. In this way, the objective of the law which is to equalize the enjoyment of the preferential tax rate accorded to an alien manager of an R/AH or ROH with a Filipino who is in the same R/AH or ROH may likewise, be extended to Filipino Bank staff so as to remove the disparity with respect to the tax rate being imposed on income being received by those Filipinos. Such being the case, Filipinos employed and are occupying managerial or technical positions as those of aliens employed by the Bank which is not only a Regional or Area Headquarters, but the Headquarters itself are subject to the preferential tax rate of 15% on their gross compensation income pursuant to Section 25(C) of the Tax Code of 1997." Relative thereto, please be informed that Section 24 (A) of the 1997 National Internal Revenue Code (Tax Code)sets the default tax rates on taxable income earned by Filipino citizens, to wit: "SEC. 24. Income Tax Rates. (A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines. xxx xxx xxx The tax shall be computed in accordance with and at the rates established in the following schedule: Not over P10,000 5% Over P10,000 but not P500+10% of the excess over P10,000 over P30,000 Over P30,000 but not P2,500+15% of the excess over P30,000 over P70,000 Over P70,000 but not P8,500+20% of the excess over P70,000 over P140,000 Over P140,000 but not P22,500+25% of the excess over over P250,000 P140,000 Over P250,000 but not P50,000+30% of the excess over over P500,000 P250,000 Over P500,000 P125,000+32% of the excess over P500,000 in 1998. Provided, That effective January 1, 1999, the top marginal rate shall be thirty-three percent (33%) and effective January 1, 2000, the said rate shall be thirty-two percent (32%)." ISTCHE As an exemption to the application of the above rates, Section 25 of the Tax Code states: "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 .Underscoring and highlighting supplied In connection with Section 25 above, Section 22 of the Tax Code provides for the definition of RHQs and ROHQs, to wit: "(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 communication; and business development." Highlighting supplied On the other hand, Chapter I of the Agreement Establishing the Asian Development Bank 1 states the purpose and functions of the ADB as follows: HATICc "Chapter I Purpose, Functions and Membership Article 1 Purpose The purpose of the Bank shall be to foster economic growth and co-operation in the region of Asia and the Far East (hereinafter referred to as the "region") and to contribute to the acceleration of the process of economic development of the developing member countries in the region, collectively and individually. Wherever used in this Agreement, the terms "region of Asia and the Far East" and "region" shall comprise the territories of Asia and the Far East included in the Terms of Reference of the United Nations Economic Commission for Asia and the Far East. Article 2 Functions To fulfill its purpose, the Bank shall have the following functions: (i) to promote investment in the region of public and private capital for development purposes; (ii) to utilize the resources at its disposal for financing development of the developing member countries in the region, giving priority to those regional, sub-regional as well as national projects and programmes which will contribute most effectively to the harmonious economic growth of the region as a whole, and having special regard to the needs of the smaller or less developed member countries in the region; (iii) to meet requests from members in the region to assist them in the coordination of their development policies and plans with a view to achieving better utilization of their resources, making their economies more complementary, and promoting the orderly expansion of their foreign trade, in particular, intra-regional trade; (iv) to provide technical assistance for the preparation, financing and execution of development projects and programmes, including the formulation of specific project proposals; (v) to co-operate, in such manner as the Bank may deem appropriate, within the terms of this Agreement, with the United Nations, its organs and subsidiary bodies including, in particular, the Economic Commission for Asia and the Far East, and with public international organizations and other international institutions, as well as national entities whether public or private, which are concerned with the investment of development funds in the region, and to interest such institutions and entities in new opportunities for investment and assistance; and (vi) to undertake such other activities and provide such other services as may advance its purpose." Due to the obvious difference in the nature, functions and purpose of the ADB on one hand, and the RHQs or ROHQs of multinational companies, on the other hand, we regret to inform you that there is no statutory basis for providing Filipino officers and staff of the ADB the same option to be taxed at the 15% preferential rate provided under Section 25 (C) of the Tax Code. Accordingly, Filipino officers and staff of the ADB shall be subject to the graduated income tax rate in accordance with Section 24 (A) of the Tax Code. In view of the foregoing and consistent with the aim of this Bureau to harmonize conflicting issuances, BIR Ruling No. 029-99, dated 11 March 1999, is hereby revoked. All prior rulings which are inconsistent herewith are likewise revoked. Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Executed 04 December 1965.