Technical knockout

Written by Roselle K. Yu, 20 August 2009

In yet another landmark exercise of power, Bureau of Internal Revenue (BIR) Commissioner Sixto Esquivias IV has, through the issuance of Revenue Memorandum Circular (RMC) No. 41-2009, revoked existing rulings found inconsistent with the said circular.

The RMC deals with the entitlement of certain individuals to the preferential tax treatment provided under Section 25(C) of the Tax Code, as implemented by existing regulations.

As a background, a preferential tax rate of 15% applies to the gross compensation income received by alien individuals occupying managerial and technical positions in regional/area headquarters (RHQs) and regional operating headquarters (ROHQs) established in the Philippines by multi-national companies.

The same tax treatment is granted to Filipinos occupying the same positions, regardless of the presence of such alien executives. Such Filipinos may choose to be taxed either at 15% on gross income or at the regular graduated rates of 5%-32% on taxable income.

The RMC expounds on the term, "managerial and technical positions," by citing a ruling issued by Commissioner Esquivias (then Deputy Commissioner for Legal and Enforcement Group) back in August 1999 (BIR Ruling No. DA-450-99). In that ruling, the Bureau held that alien employees occupying the said positions, being expatriate employees, refer only to those employed in "managerial, confidential or highly technical positions."

The ruling mentions the general labor code requirement that there must be no person in the country who is competent, able and willing to perform the same job as the alien applicant, and also alludes to the documentary requirement showing that the aliens possess high technical skills in their trade or profession before such aliens may be employed in the Philippines.

Accordingly, the RMC declares that the term "technical position" is limited only to those which are highly technical in nature or where there are no qualified and willing Filipino equivalents.

Consequently, only Filipinos occupying managerial and/or highly technical positions in RHQs/ROHQs are entitled to the 15% preferential tax treatment. All existing rulings that do not meet these conditions are thus revoked.

This turn of events may affect a lot of taxpayers since the term "highly technical" is, not surprisingly, absent in most of the rulings issued by the BIR on the matter. RHQs/ROHQs caught off guard by this apparent shift in the BIR’s gears may be feeling a bit unsure about how to proceed with their next payroll disbursement.

The obvious, necessary response is to immediately evaluate the positions and functions of local personnel who are currently enjoying the 15% rate.

While the term "highly technical" may be subject to opinion, the question of whether or not a position is managerial in nature is not a difficult one to answer in a disinterested manner. This is because the necessary elements are clearly spelled out in the RMC as well as in existing rules on labor. RHQ/ROHQ employees clearly determined to be holding managerial positions, as put forth in the RMC, should remain entitled to the preferential tax treatment.

It is worth noting that the ruling specifically revoked by the RMC (BIR Ruling No. DA-061-04) is unique because the particular positions on which BIR confirmation was sought were clearly presented as being purely "technical positions," with no managerial component.

Since the ruling was revoked only "in so far as it is inconsistent" with the provisions of the RMC, it may still be valid if the employee positions mentioned therein actually meet the RMC’s conditions.

As for those employee positions where revocation will, in fact, apply, affected taxpayers may take solace in the fact that such revocation can only apply prospectively. Section 246 of the Tax Code provides the indubitable protection that generally, any revocation, modification or reversals of any tax rules and regulations, rulings or circulars shall not be given retroactive application if doing so will be prejudicial to the taxpayer.

RHQs/ROHQs which did not secure rulings but are applying the 15% final withholding tax on its Filipino personnel should also take stock and assess the propriety of their current tax treatment in light of the RMC.

Employees whose preferential tax treatments are currently on precarious ground may find kinship with German philosopher Friedrich Nietzsche, when he said that "All things are subject to interpretation. Whichever interpretation prevails at a given time is a function of power and not truth."

While there is some truth to that aphorism, one may find greater truth in the biblical parable about the wise and foolish builders. The house that was built on rock remained standing despite the tempest, whereas the house that was built on sand came crashing down.

In the same vein, tax treatments that are founded on sound legal basis cannot be shaken when clarifications are issued; whereas treatments that rely on mere interpretations, no matter how prolific, will always be at risk of falling down like a house of cards should the BIR come a-knocking.

The term "managerial and technical positions" is found in the implementing regulations alone, and not in the law itself. Perhaps it begs the question — is the qualification built on rock or sand?