Re : Hiring a regional internal auditor"not doing business"

March 2 , 2004 SEC OPINION NO. 13-04 Re : Hiring a regional internal auditor "not doing business" Atty. Wigberto Taada Jr. Taada Vivo & Tan Law Office 6th Floor Strata 2000 Building Emerald Avenue, Ortigas Center Pasig City S i r : This refers to your query "whether or not a foreign corporation's act of hiring a Filipino in the Philippines to be its regional internal auditor will be deemed "doing business" in the Philippines. You raised the foregoing query on behalf of Children International (corporation) which is a non-profit organization organized under the Missouri Non Profit Corporation Law, with headquarters in Kansas City, Missouri, USA. Per your letter, said corporation is dedicated to improving the lives of children living in dire poverty in nine (9) countries including the Philippines. The corporation has been allegedly making substantial donations to locally registered non-governmental organizations (NGOs) which run child sponsorship programs and provide for the children's basic needs. It is now planning to hire a Filipino citizen in the Philippines to be its regional internal auditor who will be tasked to monitor and audit its donations to NGOs in the Philippines and other Asian countries. You also stated that the regional internal auditor will be based in Manila and would necessarily rent office space as well. You stressed though that the corporation has no intention of setting up operations, raising funds or directly operating any program in the Philippines. The Corporation Code of the Philippines does not itself define or categorize what acts constitute doing or transacting business .It is, however, recognized that a foreign corporation is doing, transacting, engaging in, or carrying on a business in the State when, and ordinarily when, it has entered the State by its agent and is there engaged in carrying on and transacting through them some substantial part of its ordinary or customary business, usually continuous in the sense that it may be distinguished from merely casual, sporadic, or occasional transactions or isolated acts. [ Columbia Picture Inc. vs. Sunshine Home Video Inc., GR-110318, August 28, 1996 ] The Foreign Investments Act of 1991 (RA 7042, as amended by RA 8179) and the Implementing Rules and Regulations issued thereunder enumerate the acts embraced within the term "doing business". Thus, " doing business " includes soliciting orders, service contracts, opening offices, whether liaison offices or branches; appointing representatives or distributors, operating under full control of the foreign corporation, domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to and in progressive prosecution of commercial gain or of the purpose and object of the business organization.[ Section 1(f), Rule I, IRR of RA 7042, as amended ] Based on the foregoing standards, we do not have any reason to consider the hiring of regional internal auditor as transacting business in the country. First ,the corporation will not directly undertake child sponsorship programs in the country. Neither will it solicit contributions locally to support its operations. Hence, it will not perform functions normally incidental to its business. EACIcH Second ,the function of internal auditor is advisory. In practice, internal auditor assists management with the effective discharge of its responsibilities by furnishing management with objective analyses, observations and information concerning the activities reviewed. Internal auditor has authority to recommend corrective actions but cannot insist on the implementation of their recommendations. In this case, the act of monitoring and auditing donations is merely to ensure that the grants are used in accordance with their purpose. It is just part of the corporation's management control process. It is by no means transacting business. Third ,the objective of a non profit organization is something other than earning profits. Generally, it is to render as much service as possible with a given resources, or to use as few resources as possible to render a given amount of service. [ R. N. Anthony & R. E. Herzlinger, Management Control In Non Profit Organizations 39 (1975) ] Here, the regional internal auditor will not render service provided by Children International which is child sponsorship program. He/she is to review utilization of donations allotted to such program. Please be reminded however that the foregoing opinion is based solely on the facts disclosed in your query and relevant solely to the particular issues raised therein and shall not be used in the nature of a standing rule binding upon the Commission in other cases whether of similar or dissimilar circumstances. [ SEC Memorandum Circular No. 15 dated 16 December 2003 ] For your information and guidance. Very truly yours, (SGD.) VERNETTE G. UMALI-PACO General Counsel