“What’s in a name?” by Antonette C. Tionko (January 11, 2010)
SUITS THE C-SUITE By Antonette C. Tionko
Business World (01/11/2010)
Defining ‘managerial’, ‘technical’ workers
Fully aware that foreign investments can help fuel the country’s economic growth and development, the government consistently strives to create an enticing environment for foreign investors. In fact, there is a menu of fiscal and non-fiscal incentives available for preferred areas of investments and multinational companies establishing regional or area headquarters (RHQs) and regional operating headquarters (ROHQs) in the Philippines.
Incentives granted to RHQs and ROHQs include tax breaks from corporate income and value-added taxes, as well as exemptions from customs duties and local taxes.
Certain incentives are provided for foreign and local personnel of qualified investors. Among others, foreign and local personnel of RHQs and ROHQs are subject only to 15% on their gross income under the Omnibus Investments Code and the Tax Code.
The 15% preferential tax rate has always been applied to all managerial and/or technical foreign personnel of RHQs and ROHQs. Initially, only Filipinos occupying the same positions in the same establishment were accorded the same tax treatment. However, with the enactment of Republic Act No. 8756, all Filipinos holding managerial and/or technical positions in RHQs and ROHQs were given the option to avail of the 15% preferential tax rate as an alternative to the regular tax rate on their taxable income, whether or not there is a foreign national employed in the establishment.
With these types of incentives, many multinational companies have been encouraged to make the Philippines the home base of their regional administrative operations and transshipment point of their products for Asia-Pacific markets.
However, amid the increasing number of RHQs and ROHQs in the Philippines, last July 23, 2009, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 41-2009. RMC No. 41-2009 was meant to clarify the phrase, “managerial and technical positions,” for purposes of implementing the 15% preferential tax rate on gross income of foreign and local personnel of RHQs and ROHQs.
It is significant to note that, pursuant to RMC No. 41-2009, technical positions are now limited to those with functions which are highly technical in nature or cases where there are no Filipinos available to perform the services.
The obvious net effect of this is a reduction in the number of RHQ and ROHQ personnel who may qualify for the 15% preferential tax rate incentive. Merely technical or clerical — as opposed to those positions which require special skills, knowledge and training — may no longer be deemed qualified by the BIR.
The issuance of RMC No. 41-2009 has also stirred doubts as to whether the phrase “managerial and technical positions” should be read to mean that the position has to be both managerial and highly technical so the 15% preferential tax rate may apply, or it is a mere enumeration of the cases foreign nationals could actually be employed in the Philippines.
Generally, foreign nationals seeking admission for employment in the Philippines are required to secure permits from the Department of Labor of Employment (DoLE), which may be issued in the absence of Filipinos who are competent, able and willing to perform the services. This contemplates managerial positions, which require a high degree of trust, or positions which are highly technical in nature and only foreign nationals have the required proficiency to assume.
The Omnibus Investments Code, on the other hand, provides for the issuance of special multiple entry visas to executive expatriates of RHQs and ROHQs with a minimum annual salary of $12,000.
They are also generally exempted from payment of fees under immigration laws, as well as from securing other clearances from any government department or agency. This would include a permit from the Department of Labor and Employment.
Thus, these incentives may be available to managerial employees, whether or not their position is also highly technical, but not to those employed for highly technical positions but still classified as rank and file.
In contrast, the provisions of the Omnibus Investments Code and the Tax Code apply the 15% preferential tax rate incentive to all foreign nationals employed in RHQs and ROHQs without any qualification or additional requirement.
Moreover, the provisions include “wages,” which refer to compensation for manual labor, as opposed to “salaries” which connotes a higher degree of employment or position.
This gives us an idea that the 15% preferential tax rate incentive is not applicable only to foreign nationals holding managerial positions but also to rank and file workers who may have been admitted to the Philippines for highly technical positions.
The proper administration of the incentives for investments in the Philippines is undeniably necessary to prevent any undue advantage being taken by any enterprise, domestic or foreign. On the other hand, there is also the fundamental premise for these incentives — to attract and maintain investments for sustainable national growth and development. This poses a continuing challenge for the implementing government agencies to strike a balance for everyone’s benefit.
(The author is a Tax Principal of SGV & Co.)
This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.