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MONTERO // 2A TAX DIGESTS

ARCAINA • AUSTRIA • BAÑADERA • BANTA • BELLO • BUGAY • CARAAN • CHENG • COLOQUIO • CUALOPING • DE LUIS • DIPLOMA • FAJARDO • GO
LIM, J. • LIM, Q. • LUNA • ONG • PASCUAL • PEREZ • REGIS • REYES • TRIAS • TUAZON • VANSLEMBROUCK • VILLARIN, L. • VILLARIN, P. • VILLARIVERA

BRANCH OFFICE REMITTANCE TAX rates without in effect requiring the relatively novel and
complicated way of computing the tax, as envisioned by the
BANK OF AMERICA NT & SA v. CA (Perez) private respondent. To avert unequal tax treatment, a 20%, later
[GR. No. 103092; July 21, 1994] reduced to 15%, profit remittance tax was imposed on local
“profit remitted abroad” branches on their remittances of profits abroad.

Recit-Ready:
Facts: In June 1982, petitioner foreign corporation paid 15% branch profit Facts:
remittance tax on profit from its regular banking unit operations • Petitioner is a foreign corporation duly licensed to engage in business in
and on profit from its foreign currency deposit unit operations. The the Philippines with Philippine branch office. On July 20, 1982 it paid 15%
tax was based on net profits after income tax without deducting branch profit remittance tax in the amount of P7,538,460.72 on profit from
the amount corresponding to the 15% tax. Petitioner filed a claim its regular banking unit operations and P445,790.25 on profit from its
for refund with the Bureau of Internal Revenue of that portion of foreign currency deposit unit operations or a total of P7,984,250.97. The
the payment which corresponds to the 15% branch profit tax was based on net profits after income tax without deducting the
remittance tax, on the ground that the tax should have been amount corresponding to the 15% tax.
computed on the basis of profits actually remitted, which is • Petitioner filed a claim for refund with the Bureau of Internal Revenue of
P45,244,088.85, and not on the amount before profit remittance that portion of the payment which corresponds to the 15% branch profit
tax, which is P53,228,339.82. remittance tax, on the ground that the tax should have been computed on
the basis of profits actually remitted, which is P45,244,088.85, and not on
Issue/s: the amount before profit remittance tax, which is P53,228,339.82.
WON refund may be claimed by bank Subsequently, without awaiting respondent's decision, petitioner filed a
petition for review with CTA for the recovery of the amount of
Held: Section 24 of the NIRC specifies its own tax base to be on the P1,041,424.03. CTA upheld refund, which CTA later on set aside.
"profit remitted abroad." There is nothing uncertain about the • CTA sought to deduce legislative intent of Section 24 of the NIRC, which
language of the provision. The tax is imposed on the amount sent to their minds reveal an intent “to mitigate at least the harshness of
abroad, and the law (then in force) calls for nothing further. The successive taxation.” The provision provides the following:
taxpayer is a single entity, and it should be understandable if, “Rates of tax on corporations. x x x
such as in this case, it is the local branch of the corporation, (b) Tax on foreign corporations. x x x
using its own local funds, which remits the tax to the Philippine "(2) (ii) Tax on branch profit and remittances.
Government. CTA is correct in contending that the use of the "Any profit remitted abroad by a branch to its head office shall be
word remitted may well be understood as referring to that part of subject to a tax of fifteen per cent (15%) x x x."
the said total branch profits which would be sent to the head
office as distinguished from the total profits of the branch (not all • CTA contends that the use of the word remitted may well be understood
of which need be sent or would be ordered remitted abroad). If as referring to that part of the said total branch profits which would be
the legislature indeed had wanted to mitigate the harshness of sent to the head office as distinguished from the total profits of the
successive taxation, it would have been simpler to just lower the branch (not all of which need be sent or would be ordered remitted

INCOME TAX
MONTERO // 2A TAX DIGESTS
ARCAINA • AUSTRIA • BAÑADERA • BANTA • BELLO • BUGAY • CARAAN • CHENG • COLOQUIO • CUALOPING • DE LUIS • DIPLOMA • FAJARDO • GO
LIM, J. • LIM, Q. • LUNA • ONG • PASCUAL • PEREZ • REGIS • REYES • TRIAS • TUAZON • VANSLEMBROUCK • VILLARIN, L. • VILLARIN, P. • VILLARIVERA

abroad). If the legislature indeed had wanted to mitigate the harshness tax pari-passu ends between domestic branches and subsidiaries of
of successive taxation, it would have been simpler to just lower the rates foreign corporations.
without in effect requiring the relatively novel and complicated way of
computing the tax, as envisioned by the private respondent.
COMPANIA GENERAL DE TABACOS
Issue/s:
DE FILIPINAS v. CIR (Regis)
WON refund may be claimed by bank
[C.T.A. CASE No. 4141; November 17, 1993]
—YES
“1, 2, 3 go lang refund; 4 and 5 awat na uy”

Held/Ratio: Petition GRANTED. Decision of CTA appealed from reversed
Recit-Ready:
and set aside, and that of the CA reinstated.
Facts: Petitioner, a foreign corporation engaged in the business as leaf
tobacco dealer, importer, and general merchants, filed a request
YES.
for refund of the branch profit remittance taxes paid by it for the
o In the 15% remittance tax, the law specifies its own tax base to be on
years 1980-85. It claims that the tax base for computing the
the "profit remitted abroad." There is nothing uncertain about the
language of the provision. The tax is imposed on the amount sent branch remittance tax is the amount actually remitted abroad. The
abroad, and the law (then in force) calls for nothing further. The petitioner relied on the case of CIR v Burroughs which was based
taxpayer is a single entity, and it should be understandable if, such as on a Jan. 1980 BIR ruling that says tax base to which 15% BPR
in this case, it is the local branch of the corporation, using its own local tax shall be imposed is the profit actually remitted abroad.
funds, which remits the tax to the Philippine Government. Respondent CIR counters that the ruling in Burroughs case is
o The remittance tax was conceived in order to equalize the income tax
inapplicable because of the Memo Circular 8-82 which took effect
burden on foreign corporations maintaining, on one hand, local branch
in 1982. In the said Memo, the rule is that the amount to which
offices and organizing, and on the other hand, subsidiary domestic
the BPR tax shall be imposed is that which was actually applied
corporations where at least a majority of all the latter's shares of stock
by the branch with the Central Bank of the Philippines.
are owned by such foreign corporations.
o Prior to the amendatory provisions of the Revenue Code, local
Issue/s:
branches were made to pay only the usual corporate income tax of
1) WON the right to claim for refund of payments has already prescribed
25%-35% on net income (now a uniform 35%) applicable to resident
2) WON the petitioner is legally entitled to the refund on alleged excess
foreign corporations (foreign corporations doing business in the
branch profit remittance taxes paid during the years 1980 to 1983. (MAIN
Philippines). While Philippine subsidiaries of foreign corporations were
ISSUE)
subject to the same rate of 25%-35% (now also a uniform 35%) on
3) WON the petitioner is legally entitled to the refund on alleged excess
their net income, dividend payments, however, were additionally
branch profit remittance taxes paid during the years 1984-1985. (MAIN
subjected to a 15% (withholding) tax (reduced conditionally from
ISSUE)
35%). To avert what would otherwise appear to be an unequal tax
treatment on such subsidiaries vis-a-vis local branch offices, a 20%,
Held:
later reduced to 15%, profit remittance tax was imposed on local
1) Yes. The law provides that in a petition for tax refund, one cannot bring
branches on their remittances of profits abroad. But this is where the
an action after the expiration of 2 years from date of payment of tax. In

INCOME TAX
MONTERO // 2A TAX DIGESTS
ARCAINA • AUSTRIA • BAÑADERA • BANTA • BELLO • BUGAY • CARAAN • CHENG • COLOQUIO • CUALOPING • DE LUIS • DIPLOMA • FAJARDO • GO
LIM, J. • LIM, Q. • LUNA • ONG • PASCUAL • PEREZ • REGIS • REYES • TRIAS • TUAZON • VANSLEMBROUCK • VILLARIN, L. • VILLARIN, P. • VILLARIVERA

this case, the tax was paid prior to February 7, 1984 and the case was Issue/s:
filed only on April 9,1987, thus, action had prescribed. 1) WON the right to claim for refund of payments has already
2) Yes. The rule is that interests and dividends received by foreign prescribed
corporation during a taxable year from all sources within shall not be —YES
considered as branch profits unless the same are effectively 2) WON the petitioner is legally entitled to the refund on alleged
connected with the conduct of trade and business of the excess branch profit remittance taxes paid during the years 1980 to
corporation. The phrase “effectively connected” was interpreted to 1983. (MAIN ISSUE)
mean income derived from the business activity in which the —YES
corporation is engaged. In this case, the corporation is engaged in 3) WON the petitioner is legally entitled to the refund on alleged
business of leaf tobacco dealer. In its corporate quarterly income tax excess branch profit remittance taxes paid during the years 1984-
returns submitted to respondent, petitioner argues that the interests it 1985. (MAIN ISSUE)
received from savings deposit of Philtrust, or those from Land Bank —NO
bonds are not effectively connected with the business it is engaged in
hence, not subject to tax. Held/Ratio: Wherefore, in view of the foregoing, respondent CIR is hereby
3) NO. As to the 1984 and 1985 branch profit remittance taxes, no refund ordered to refund in favor of petitioner, the amount of P152,590.50
or tax credit is due the petitioner since the latter did not present any representing overpaid 15% branch profit remittance taxes on dividends,
proof of passive income it received during the period. Considering that interests and capital gain received during the years 1981 to 1983. No
the 15% branch profit remittance tax is imposed and collected at pronouncement as to cost.
source, necessarily the tax base should be the amount ACTUALLY
APPLIED for by the branch with the Central Bank of the Philippines as 1) YES. According to Sec. 230 of the Tax Code, for the recovery of tax
profit to be remitted abroad. erroneously collected, “In any case, no such suit or proceeding
shall be begun after the expiration of two years from the date of
Facts: payment of the tax or penalty regardless of any supervening cause
• Petitioner, a foreign corporation duly licensed by Philippine laws to that may arise after payment.”
engage in business through its branch office, filed a request before the o It is evident that payment made prior to April 9, 1985, had already
respondent Commissioner of Internal Revenue for the refund of the sum prescribed. The profit remittance tax corresponding to branch profit for
of P1, 447,295.62, as alleged over paid branch profit remittance taxes at 1980 was paid on February 7, 1984. When this case was filed on April
the years 1980 to 1983. 9,1987, more than two years have lapsed from the time the payment
• Thereafter or on April 8, 1987, petitioner filed another request for the of the tax was made.
refund of P321, 635.40, this time for the years 1984 and 1985.
• Since respondent has not acted on petitioner's request, the latter filed the 2) YES. WITH THE TAX PAID FOR YEARS 1981-1983: After considering
instant petition on April 9, 1987 to interrupt the running of the prescriptive the facts and issues of the case, this Court holds the petitioner
period for claims for refund. entitled to a refund or tax credit in the amount of Pl52, 690.61
corresponding to over paid branch profit remittance taxes during
the years from 1981 to 1983.

INCOME TAX
MONTERO // 2A TAX DIGESTS
ARCAINA • AUSTRIA • BAÑADERA • BANTA • BELLO • BUGAY • CARAAN • CHENG • COLOQUIO • CUALOPING • DE LUIS • DIPLOMA • FAJARDO • GO
LIM, J. • LIM, Q. • LUNA • ONG • PASCUAL • PEREZ • REGIS • REYES • TRIAS • TUAZON • VANSLEMBROUCK • VILLARIN, L. • VILLARIN, P. • VILLARIVERA

o The rule is that interests and dividends received by foreign the branch with the Central Bank of the Philippines as profit to be
corporation during a taxable year from all sources within shall not be remitted abroad."
considered as branch profits unless the same are effectively o In the instant case the branch profit remittance taxes were paid after
connected with the conduct of trade and business of the the effectivity of the Memorandum Circular No. 8-82. We hold that
corporation. The phrase “effectively connected” was interpreted to what should therefore apply is Memo Circular No. 8-82 as correctly
mean income derived from the business activity in which the advanced by the respondent. (Dun sa Burroughs case, di pa in effect
corporation is engaged. In this case, the corporation is engaged in ung Memo 8-82 kaya ung Jan.1980 ruling ang inapply which says na
business of leaf tobacco dealer. In its corporate quarterly income tax ung profit actually remitted aborad ung tax base pero sa case na ‘to,
returns submitted to respondent, petitioner argues that the interests in effect na ang Memo 8-82 which says na ung amount actually
it received from savings deposit of Philtrust, or those from Land applied sa CB ang tax base kaya ito na ung iaapply)
Bank bonds are not effectively connected with the business it is o Furthermore, in the CIR v. Bank of America, the Court had the chance
engaged in hence, not subject to tax. to discuss the rationale behind the Memo Circular No. 8-82. It said
“"The use of the word remitted may well be understood as referring to
3) NO. As to the 1984 and 1985 branch profit remittance taxes, no that part of the said total branch profits which would be sent to the
refund or tax credit is due the petitioner since the latter did not Head office as distinguished from the total profits of the branch (not all
present any proof of passive income it received during the period. of which need be sent or would be ordered remitted abroad). If the
Considering that the 15% branch profit remittance tax is imposed legislature indeed had wanted to mitigate the harshness of successive
and collected at source, necessarily the tax base should be the taxation, it would have been simpler to just lower the rates without in
amount ACTUALLY APPLIED for by the branch with the Central effect requiring the relative novel and complicated way of computing
Bank of the Philippines as profit to be remitted abroad. the tax, as envisioned by the herein private respondent. The same
o Petitioner contends that the tax base for computing the branch profit result would have been achieved. NIMIA SUBTILITAS IN JURE
remittance tax is the profit actually remitted abroad net of income REPROBATUR, ET TALIS CERTITUDO CERTITUDIMEM
already subjected to final tax. CONFUNDIT (The laws does not allow of a captious and strained
! In support of his contention, he brought to the attention of the Court intendtment, for such nice pretence of certainty confounds true and
about its previous ruling in the case of CIR v. Burroughs which legal certainty)
based its judgment in its BIR Ruling dated Jan. 1980. It was held in o Having found that the questioned taxes were paid when the applicable
that case that the tax base to which the 15% branch profit ruling is Revenue Memorandum Circular No. 8 - 82, "then what should
remittance tax shall be imposed is profit actually remitted abroad apply as taxable base in computing the 15% branch profit remittance
and not on the total branch profits out of which remittance is to be tax is the amount applied for with the Central Bank as profit to be
made. remitted abroad”.
o Respondent, on the other hand, contends that the case of Burroughs
is not applicable to the instant case because of Revenue
Memorandum Circular No.8- 8 2, dated March 17, 1982, which
states that since the "tax is imposed and collected at source,
necessarily the tax base should be the amount actually applied for by

INCOME TAX
MONTERO // 2A TAX DIGESTS
ARCAINA • AUSTRIA • BAÑADERA • BANTA • BELLO • BUGAY • CARAAN • CHENG • COLOQUIO • CUALOPING • DE LUIS • DIPLOMA • FAJARDO • GO
LIM, J. • LIM, Q. • LUNA • ONG • PASCUAL • PEREZ • REGIS • REYES • TRIAS • TUAZON • VANSLEMBROUCK • VILLARIN, L. • VILLARIN, P. • VILLARIVERA

COMPANIA GENERAL DE TABACOS To include them again as subject to branch profit remitance tax under the
DE FILIPINAS v. CIR (Regis) same Section 24 (b)(2)(ii) would be contrary to law. As worded in the
[C.T.A. CASE No. 4451; October 23, 1993] previously mentioned provision, the rule is that interests and dividends
“Same ruling as above; Yes to Refund for year 1985-1986; Income NOT received by foreign corporation during a taxable year from all sources
connected with trade or business NOT included in computation for BPR tax” within shall not be considered as branch profits unless the same are
effectively connected with the conduct of trade and business of the
Recit-Ready: corporation. The phrase “effectively connected” was interpreted to mean
Facts: Petitioner, a foreign corporation engaged in the business as leaf income derived from the business activity in which the corporation is
tobacco dealer, importer, and general merchants, paid the 15% engaged. In this case, the corporation is engaged in business of leaf
BPR tax for years 1985 (partial) and 1986 in the amount of P3, tobacco dealer. In its corporate quarterly income tax returns submitted to
148,267.96. Thereafter, it filed a request for refund of the branch respondent, petitioner argues that the interests it received from savings
profit remittance taxes paid by it for the years 1985-86. deposit of Philtrust, or those from Land Bank bonds and cash dividends
from received from PLDT and Tabacalera Industrial Dev’t Corporation of
Issue/s: the Philippines are not effectively connected with the business it is
1.) WON the BPR taxes are computed based on the profits actually engaged in hence, not subject to tax
remitted abroad or on the total branch profits out of which remittance is
made Facts:
2.) WON passive income which are already subjected to the final tax are • Petitioner is a foreign corporation duly licensed by Philippine laws to
still included for purposes of computing the BPR tax engage in business through its branch office.
• On May 3, 1988, petitioner paid the 15% BPR tax for years 1985 (partial)
Held: and 1986 in the amount of P3, 148,267.96.
1.) In ruling for the respondent CIR, the Court ruled that the tax base • Thereafter, petitioner filed a claim for refund with respondent in the
should be the amount which was applied for with the Central Bank of the amount of P593K representing alleged overpaid BPR taxes.
Philippines. Since there is a new Memo Circular issued which is more • However, up to the filing of the petition for review, respondent has not
applicable in this case, such is the appropriate rule to use. The Memo acted on petitioner’s claim.
Circular 8-82 was issued only on March 17, 1982. The respondent
Burroughs paid its remittance tax on March 14, 1982. Under Sec. 327 of Issue/s:
NIRC, it cannot be given retroactive effect. In view of the fact that 1.) WON the BPR taxes are computed based on the profits actually
petitioner's branch profit remittance tax for 1985 (partial) and 1986 were remitted abroad or on the total branch profits out of which remittance
paid on May 3, 1988, after the effectivity of Revenue Memorandum is made
Circular 8-82, then what should apply as taxable base in computing the —NO
15% BPR tax is the amount applied for with the Central Bank as profit to 2.) WON passive income which are already subjected to the final tax
be remitted abroad and not the total amount of branch profits. are still included for purposes of computing the BPR tax
—NO
2.) In ruling for the petitioner, the Court ruled that pursuant to Section
24(c) and (d) of the NIRC, dividends and interest are subject to final tax.

INCOME TAX
MONTERO // 2A TAX DIGESTS
ARCAINA • AUSTRIA • BAÑADERA • BANTA • BELLO • BUGAY • CARAAN • CHENG • COLOQUIO • CUALOPING • DE LUIS • DIPLOMA • FAJARDO • GO
LIM, J. • LIM, Q. • LUNA • ONG • PASCUAL • PEREZ • REGIS • REYES • TRIAS • TUAZON • VANSLEMBROUCK • VILLARIN, L. • VILLARIN, P. • VILLARIVERA

Held/Ratio: Wherefore, in view of the foregoing, respondent CIR is hereby Industrial Dev’t Corporation of the Philippines are not effectively
ordered to refund in favor of petitioner, the amount of P121,696.34 connected with the business it is engaged in hence, not subject to tax.
representing overpaid 15% branch profit remittance tax on interest and o Furthermore, pursuant to Section 24(c) and (d) of the NIRC, dividends
dividends received. No costs. and interest are subject to final tax. To include them again as subject
to branch profit remitance tax under the same Section 24 (b)(2)(ii)
1.) NO. (As discussed in the previous Compania case), the petitioner to would be contrary to law.
support its claim cited the Burroughs case which has a ruling that
applied the BIR ruling dated Jan. 1980. Since there is a new Memo
Circular issued which is more applicable in this case, such is the ITAD BIR RULING NO. 018-09 (Reyes)
appropriate rule to use. The Memo Circular 8-82 was issued only on [Det Norske Inquiry; June 23, 2009]
March 17, 1982. The respondent Burroughs paid its remittance tax on “Norwegian company; additional tax to the BPRT of a domestic branch office
March 14, 1982. Under Sec. 327 of NIRC, it cannot be given retroactive is valid and is not discriminatory”
effect.
o If such Memo was issued prior to the Burroughs case, then it should Recit-Ready:
have been the rule to be applied. But it is not. It cannot be given Facts: Det Norske is a Norwegian corporation licensed to do business in
retroactive effect. Thus, the reliance on the Burroughs case is not the Philippines. For the years 1998 to 2004, its Philippine branch
tenable since the Memo Circular is really the correct rule to be applied. remitted branch profits to the head office in Norway, thus, the
o Thus, in view of the fact that petitioner's branch profit remittance corresponding branch profits remittance taxes (BPRT) were
tax for 1985 (partial) and 1986 were paid on May 3, 1988 , after the withheld. The country manager of Det Norske now claims that it
effectivity of Revenue Memorandum Circular 8-82, then what should be exempt from the tax pursuant to Article 25 of the
should apply as taxable base in computing the 15% BPR tax is Philippines-Norway tax treaty.
the amount applied for with the Central Bank as profit to be
remitted abroad and not the total amount of branch profits. Issue/s:
WON the branch profits remitted by Det Norske Philippines to Det Norske
2.) NO. (Same as the ruling in above case) Norway are exempt from the 15% BPRT pursuant to Article 25 of the
o As worded in Section 21(b)(2)(ii) the rule is that interests and Philippines-Norway tax treaty.
dividends received by foreign corporation during a taxable year from
all sources within shall not be considered as branch profits unless Held: In ruling against Det Norske, the BIR noted that the Philippines-
the same are effectively connected with the conduct of trade and Norway tax treaty recognizes the BPRT and gives way to its
business of the corporation. The phrase “effectively connected” was imposition as paragraph 7, Article 10 of the tax treaty provides
interpreted to mean income derived from the business activity in which that branch profits remitted by a branch office of a Norwegian
the corporation is engaged. In this case, the corporation is engaged in corporation in the Philippines to its head office in Norway may be
business of leaf tobacco dealer. In its corporate quarterly income tax subject to an additional tax like the BPRT at a rate not to exceed
returns submitted to respondent, petitioner argues that the interests it 15 percent. It is not discriminatory since Det Norske is not a
received from savings deposit of Philtrust, or those from Land Bank resident corporation within the view of the treaty.
bonds and cash dividends from received from PLDT and Tabacalera

INCOME TAX
MONTERO // 2A TAX DIGESTS
ARCAINA • AUSTRIA • BAÑADERA • BANTA • BELLO • BUGAY • CARAAN • CHENG • COLOQUIO • CUALOPING • DE LUIS • DIPLOMA • FAJARDO • GO
LIM, J. • LIM, Q. • LUNA • ONG • PASCUAL • PEREZ • REGIS • REYES • TRIAS • TUAZON • VANSLEMBROUCK • VILLARIN, L. • VILLARIN, P. • VILLARIVERA

Facts: favorably levied in that other State than the taxation levied on
• Det Norske is a corporation organized and existing under the laws of enterprises of that other State carrying on the same activities. This
Norway. provision shall not be construed as obliging a Contracting State to
o It is a tax resident of Norway. grant to residents of the other Contracting State any personal
o It is also licensed by the SEC to establish a branch office in the allowances, reliefs and reductions for taxation purposes on account
Philippines (Det Norske Philippine Branch),whose office is of civil status or family responsibilities which it grants to its own
located at the Ground Floor, G-5, Velco Center, corner Ocampo residents."
and Delgado Streets, Port Area, Manila, Philippines. • Det Norske claims that under the domestic tax laws of the Philippines,
• Det Norske Philippine Branch had remitted branch profits to Det Norske no withholding tax is imposed on the remittance of the after-tax profits of
for taxable years 1998 to 2004, and also withheld the corresponding a branch of a domestic corporation in the Philippines to its head office in
branch profits remittance tax (BPRT): the Philippines, and that applying the principles of non-discrimination in
the tax treaty, no BPRT should likewise be imposed on the remittance of
Taxable Year Branch Profits Applied BPRT Withheld the after-tax profits of a branch of a Norwegian corporation in the
for Remittance Philippines to its head office in Norway.
2004 PHP10,789,599.96 PHP1,618,440.00 o The BPRT imposed on the remittance of branch profits by a
2003 16,482,540.00 2,472,381.00 local branch of a Norwegian corporation to its head office in
2002 15,534,149.00 2,330,122.35 Norway is more burdensome (or less favorable) than the tax
treatment on the local branch of a domestic corporation whose
2000 11,128,536.00 1,669,280.40
remittance of profits is not subject to the BPRT.
1999 2,500,550.00 375,082.50
1998 1,310,642.00 196,596.30 Issue/s:
WON the branch profits remitted by Det Norske Philippine Branch to
• The country manager of Det Norske wrote to the BIR, contending that Det Norske Norway are exempt from the 15% BPRT pursuant to Article
the imposition of the BPRT is contrary to the provisions of paragraphs 1 25 of the Philippines-Norway tax treaty.
and 2, Article 25 of the Convention between the Republic of the —NO
Philippines and the Kingdom of Norway for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Held/Ratio: Petition GRANTED. In applying the doctrine of animation, Court
Income and on Capital (Philippines-Norway tax treaty), which provide: rules for the Applicant.

Article 25 – Non-Discrimination NO. The BIR emphasized the doctrine of proper interpretation of the
1. Nationals of a Contracting State shall not be subjected in the other laws and of equal treatment between a permanent establishment of a
Contracting State to any taxation or any requirement connected foreign (Norwegian) enterprise and a domestic enterprise.
therewith, which is other or more burdensome than the taxation and
connected requirements to which nationals of that other State in the o The law which relates to this case is Section 28(A)(5) of the Tax Code
same circumstances are or may be subjected. of 1997, which provides:
2. The taxation on a permanent establishment which an enterprise of a
Contracting State has in the other Contracting State shall not be less SEC. 28. Rates of Income Tax on Foreign Corporations. —

INCOME TAX
MONTERO // 2A TAX DIGESTS
ARCAINA • AUSTRIA • BAÑADERA • BANTA • BELLO • BUGAY • CARAAN • CHENG • COLOQUIO • CUALOPING • DE LUIS • DIPLOMA • FAJARDO • GO
LIM, J. • LIM, Q. • LUNA • ONG • PASCUAL • PEREZ • REGIS • REYES • TRIAS • TUAZON • VANSLEMBROUCK • VILLARIN, L. • VILLARIN, P. • VILLARIVERA

(A)Tax on Resident Foreign Corporations. — its imposition, as Article 10 (Dividends), paragraph 7 thereof,
(5) Tax on Branch Profits Remittances. — Any profit remitted provides:
by a branch to its head office shall be subject to a tax of fifteen 7. Nothing in this Convention shall be construed as
percent (15%) which shall be based on the total profits applied or preventing a Contracting State from imposing in accordance
earmarked for remittance without any deduction for the tax with its internal law, a tax apart from the corporate income
component thereof (except those activities which are registered with tax on remittances of profits by a branch to its head office
the Philippine Economic Zone Authority). The tax shall be collected provided that the tax so imposed shall not exceed fifteen
and paid in the same manner as provided in Sections 57 and 58 of per cent of the amount remitted.
this Code: Provided, That interests, dividends, rents, royalties, • According to paragraph 7, branch profits remitted by a branch
including remuneration for technical services, salaries, wages, office of a Norwegian corporation in the Philippines to its head
premiums, annuities, emoluments or other fixed or determinable office in Norway may be subject to an additional tax like the
annual, periodic or casual gains, profits, income and capital gains BPRT at a rate not to exceed 15 of the amount remitted.
received by a foreign corporation during each taxable year from all
sources within the Philippines shall not be treated as branch profits The BPRT in relation to Article 25 of the tax treaty
unless the same are effectively connected with the conduct of its • Paragraph 1, Article 25 of the Philippines-Norway tax treaty provides
trade or business in the Philippines. that nationals of Norway shall not be subjected in the Philippines to
any taxation, or any requirement connected therewith, which is other
Purpose of the BPRT or more burdensome than the taxation and connected requirements
to which nationals of the Philippines in the same circumstances are
! The reason why the BPRT was introduced is to put into the same or
or may be subjected. According to the OECD Model Convention on
similar footing the tax treatment of foreign corporations engaged in Income and Capital, the scope of this paragraph would be
trade or business in the Philippines through local branches with limited to residents of the Philippines only.
foreign corporations not engaged in trade or business in the • Under the definition of a ‘resident’ in the said law, Det Norske is a
Philippines but maintaining ownership in domestic corporations in the resident of the State where it is liable to tax by reason of its domicile,
Philippines (subsidiaries). residence, place of management, or any other similar criterion of a
o Without the BPRT, the first type of foreign corporations might similar nature.
have an undue advantage over the second type of foreign o Det Norske's domicile, residence, or place of
corporations because dividends remitted to the latter management is in Norway and as such is a resident of
corporations by their subsidiaries would be subjected to a Norway for purposes of the Philippines-Norway tax
second layer of income taxation even if the profits of the treaty.
subsidiaries out of which the dividends were paid were o While Det Norske is licensed to establish a branch office in
already subjected to a first layer of income taxation the Philippines, this alone will not suffice to say that Det
(corporate income tax). Thus the BPRT was introduced. Norske's domicile, residence, or place of management is
also in the Philippines thereby not making Det Norske a
The BPRT is permitted under the Philippines-Norway tax treaty resident of the Philippines for purposes of the tax treaty.
! Despite it being an additional income tax, it is noteworthy that the
Philippines-Norway tax treaty recognizes the BPRT and gives way to

INCOME TAX
MONTERO // 2A TAX DIGESTS
ARCAINA • AUSTRIA • BAÑADERA • BANTA • BELLO • BUGAY • CARAAN • CHENG • COLOQUIO • CUALOPING • DE LUIS • DIPLOMA • FAJARDO • GO
LIM, J. • LIM, Q. • LUNA • ONG • PASCUAL • PEREZ • REGIS • REYES • TRIAS • TUAZON • VANSLEMBROUCK • VILLARIN, L. • VILLARIN, P. • VILLARIVERA

o Relative thereto, paragraph 1, Article 25 of the Philippines- • Thus, the BPRT, the corporate income tax on taxable profits, the
Norway tax treaty does not provide a legal basis for the non- withholding tax on certain types of income, and other similar taxes
imposition of the BPRT. on income, can be imposed by the Philippines on a permanent
establishment without going against the principle of equal treatment
• Paragraph 2 of the Philippines-Norway tax treaty provides that the envisaged in paragraph 2, Article 25 of the Philippines-Norway tax
taxation on a permanent establishment which an enterprise of treaty provided that the aggregate taxes levied on the
Norway has in the Philippines shall not be less favorably levied in permanent establishment are not greater than the taxes levied
the Philippines than the taxation levied on enterprises of the
on a domestic enterprise.
Philippines carrying on the same activities.
o According to the OECD Model Convention, the purpose of
paragraph 2 is to end all discrimination in the treatment of Taxation of permanent establishments in the form of a branch and
permanent establishments as compared with resident taxation of domestic enterprises
enterprises belonging to the same sector of activities, as • In most cases, and in relation to Philippines tax treaties and the Tax
regards taxes based on business activities, and especially Code of 1997, a foreign enterprise is considered to have a
taxes on business profits. permanent establishment in the Philippines when it is engaged in
o However, the Convention likewise noted that the experience trade or business in the Philippines through a branch or
of the OECD member countries have shown that there was a branches. For this type of permanent establishment, a foreign
difficulty in defining clearly and completely the substance of enterprise (like Det Norske) is registered with and licensed by the
the principle of equal treatment envisaged in paragraph 2, Securities and Exchange Commission to establish a branch
which has led to wide differences of opinion with regard to office and engage in trade or business in the Philippines.
the many implications of this principle. • In terms of tax liability alone, a foreign enterprise, whether or not
o The main reason for the difficulty seems to reside in the engaged in trade or business in the Philippines, is in a more
actual nature of the permanent establishment, which is not a
advantageous position as compared to a domestic enterprise
separate legal entity but only part of an enterprise that has
because it is taxable only on income derived from sources within the
its head office in another State.
o The situation of the permanent establishment is different Philippines. A domestic enterprise is, on the other hand, taxable on
from that of a domestic enterprise, which constitutes a single income derived from sources within and without the Philippines.
entity all of whose activities, including its fiscal affairs, can be o Also, in terms of rate and structure of tax, there are
fully brought within the purview of the State where it has its preferential tax regimes that are or can be enjoyed only by
head office. The implications of the equal treatment clause foreign enterprises engaged in trade or business in the
will be examined under several aspects of the levying of tax. Philippines and which are not available to domestic
• The BIR is of the opinion and so holds that, as far as the Philippines enterprises.
is concerned, as long as the aggregate taxes imposed by the
Philippines on a permanent establishment of a foreign • Summary
enterprise in the Philippines are not greater than the taxes o The Philippines-Norway tax treaty recognizes the BPRT
imposed by the Philippines on a domestic enterprise, it cannot and gives way to its imposition as paragraph 7, Article
be said that the permanent establishment is treated less 10 of the tax treaty provides that branch profits remitted
favorably in the Philippines than the domestic enterprise. by a branch office of a Norwegian corporation in the
Philippines to its head office in Norway may be subject

INCOME TAX
MONTERO // 2A TAX DIGESTS
ARCAINA • AUSTRIA • BAÑADERA • BANTA • BELLO • BUGAY • CARAAN • CHENG • COLOQUIO • CUALOPING • DE LUIS • DIPLOMA • FAJARDO • GO
LIM, J. • LIM, Q. • LUNA • ONG • PASCUAL • PEREZ • REGIS • REYES • TRIAS • TUAZON • VANSLEMBROUCK • VILLARIN, L. • VILLARIN, P. • VILLARIVERA

to an additional tax like the BPRT at a rate not to exceed act as supervisory, communications and coordinating center for their
15 percent. affiliates, subsidiaries, or branches in the Asia-Pacific Region and other
o Paragraph 1, Article 25 of the Philippines-Norway tax treaty foreign markets.
does not provide a legal basis for the non-imposition of the
BPRT. The principle of equal treatment intended by this (EE) The term 'regional operating headquarters' shall mean a branch
paragraph is limited to nationals of the Philippines and of established in the Philippines by multinational companies which are engaged
Norway who are both residents of the Philippines. While Det in any of the following services: general administration and planning;
Norske is a national of Norway, it is not, however, a resident business planning and coordination; sourcing and procurement of raw
of the Philippines under paragraph 1, Article 4 of the tax materials and components; corporate finance advisory services; marketing
treaty. control and sales promotion; training and personnel management; logistic
o Paragraph 2, Article 25 of the Philippines-Norway tax treaty services; research and development services and product development;
lays down a principle of equal treatment between a technical support and maintenance; data processing and communications;
permanent establishment of a Norwegian enterprise in the and business development.
Philippines and a domestic enterprise. Similar with the
United States, the Philippines is of the view that as long as
the aggregate taxes imposed by the Philippines on a REVENUE REGULATIONS NO. 11 – 2010
permanent establishment are not greater than the taxes October 26, 2010
imposed by the Philippines on a domestic enterprise, it
cannot be considered that the permanent establishment is SUBJECT : Further Clarifying the Term "Managerial and
treated less favorably in the Philippines than the domestic Technical Positions" Under Section 2.57.1 (D) of Revenue Regulations
enterprise. In this connection, while the BPRT is imposed (RR) No. 2-98, as Amended, by RR No. 12-2001, Implementing Section
only on permanent establishments and not on domestic 25 (C) of the National Internal Revenue Code of 1997 (Tax Code), as
enterprises, the burden of this tax upon a permanent Amended and Modifying for this Purpose Revenue Memorandum Circular
establishment is, however, mitigated by the current tax (RMC) No. 41-09 Including Guidelines on Availment of the Fifteen Percent
regimes which greatly favor the permanent establishment (15%) Preferential Income Tax Rate for Qualified Filipino Personnel
over the domestic enterprise. Employed by Regional or Area Headquarters (RHQs) and Regional
Operating Headquarters (ROHQs) of Multinational Companies

REGIONAL OR AREA HEADQUARTERS AND ROHQS TO : All Revenue Officials and Personnel and Others
Concerned
NATIONAL INTERNAL REVENUE CODE
SECTION 22. Definitions. – When used in the Title: SECTION 1. Background. — On July 23, 2009 Revenue
Memorandum Circular (RMC) No. 41-09 was issued essentially defining
(DD) The term 'regional or area headquarters' shall mean a branch the terms managerial and/or technical positions of Filipino personnel
established in the Philippines by multinational companies and which employed by Regional or Area Headquarters (RHQs) and Regional
headquarters do not earn or derive income from the Philippines and which Operating Headquarters (ROHQs) of multinational companies. The phrase

INCOME TAX
MONTERO // 2A TAX DIGESTS
ARCAINA • AUSTRIA • BAÑADERA • BANTA • BELLO • BUGAY • CARAAN • CHENG • COLOQUIO • CUALOPING • DE LUIS • DIPLOMA • FAJARDO • GO
LIM, J. • LIM, Q. • LUNA • ONG • PASCUAL • PEREZ • REGIS • REYES • TRIAS • TUAZON • VANSLEMBROUCK • VILLARIN, L. • VILLARIN, P. • VILLARIVERA

"managerial and technical positions" appears in Section 2.57.1 (D) of only to positions that are highly technical in nature or where there are no
Revenue Regulations (RR) No. 2-98, as amended by, among others, RR Filipinos who are competent, able and willing to perform the services for
No. 12-2001, implementing Section 25 (C) of the Tax Code. Thus: which the aliens are desired.

"(D) Income Derived by Alien Individuals Employed by Regional or Finally, the language of RMC No. 41-09 implied that in order to enjoy the
Area Headquarters and Regional Operating Headquarters of Multinational fifteen percent (15%) final income tax rate on their gross compensation
Companies. — A final withholding tax equivalent to fifteen percent (15%) income, Filipino nationals in ROHQs or RHQs must be employed in a
shall be withheld by the withholding agent from the gross income received managerial and highly technical position.
by every alien individual occupying managerial and technical positions in
regional or area headquarters and regional operating headquarters and Thus, the issuance of RMC No. 41-09 has resulted in some confusion
representative offices established in the Philippines by multinational among the tax treatment of Filipinos employed by ROHQs or RHQs.
companies as salaries, wages, annuities, compensation, remuneration, These regulations are therefore being issued to clarify the provisions of
and other emoluments, such as honoraria and allowances, except income Section 2.57-1 (D) of RR No. 2-98, as amended.
which is subject to fringe benefits tax, from such regional or area
headquarters and regional operating headquarters. SECTION 2. Who Are Qualified. — Filipinos employed by ROHQs or
RHQs in a managerial or technical position shall have the option to be
The same tax treatment shall apply to Filipinos employed and occupying taxed at either fifteen percent (15%) of their gross income or at the regular
the same positions as those aliens employed by regional or area income tax rate on taxable compensation income in accordance with
headquarters and regional operating headquarters of multinational Section 24 of the Tax Code, if the employer is governed by Book III of
companies, regardless of whether or not there is an alien executive Executive Order (EO) No. 226, as amended by Republic Act (RA) No.
occupying the same position. Provided, that such Filipinos shall have the 8756. All other employees are considered as regular employees who are
option to be taxed at either 15% of gross income or at the regular rate on subject to the regular income tax rate on their taxable compensation
their taxable income in accordance with the Tax Code of 1997, if the income.
employer (Regional or Operating headquarters/Regional or Area
headquarters) is governed by Book III of E.O. 226, as amended by R.A. SECTION 3. Eligibility to the 15% Preferential Tax Rate. —
No. 8756. In case the Filipino opted to be taxed at the regular tax rate Filipinos exercising the option to be taxed at fifteen percent (15%)
under Sec. 24 of the Tax Code of 1997, the provisions of Sec. 2.79(A) to preferential rate for occupying the same managerial or technical position
(D) of Revenue Regulations No. 2-98 shall apply. as that of an alien employed in an ROHQ or RHQ must meet all the
The term "multinational company" means a foreign firm or entity engaged following requirements:
in international trade with its affiliates or subsidiaries or branch offices in (a) Position and Function Test — The employee must occupy a
the Asia-Pacific Region and other foreign markets." (emphasis supplied) managerial position or technical position AND must actually be
In defining the term "managerial employee", RMC No. 41-09 cited exercising such managerial or technical functions pertaining to
Philippine Appliance Corp. vs. Laguesma, 226 SCRA 730 (1993) and said position;
Villuga vs. NLRC, 225 SCRA 537 (1993). (b) Compensation Threshold Test — In order to be considered a
managerial or technical employee for income tax purposes, the
RMC No. 041-09 also defined the term "technical position" as being limited employee must have received, or is due to receive under a

INCOME TAX
MONTERO // 2A TAX DIGESTS
ARCAINA • AUSTRIA • BAÑADERA • BANTA • BELLO • BUGAY • CARAAN • CHENG • COLOQUIO • CUALOPING • DE LUIS • DIPLOMA • FAJARDO • GO
LIM, J. • LIM, Q. • LUNA • ONG • PASCUAL • PEREZ • REGIS • REYES • TRIAS • TUAZON • VANSLEMBROUCK • VILLARIN, L. • VILLARIN, P. • VILLARIVERA

contract of employment, a gross annual taxable compensation of Section 2.79 (B) (3) of RR No. 2-98, as amended, categorizes taxable
at least PhP975,000.00 (whether or not this is actually received); compensation income into regular taxable compensation income and
Provided that, a change in compensation as a consequence of supplementary compensation income. Under the said regulations, regular
which, such employee subsequently receiving less than the taxable compensation income includes basic salary, fixed allowances for
compensation threshold stated in this section shall, for the representation, transportation and other allowances paid to an employee
calendar year when the change becomes effective, result in the per payroll period. Supplementary compensation is defined by the same
employee being subject to the regular income tax rate. regulations as payments made to an employee in addition to the regular
compensation such as commission, overtime pay, taxable bonus and
Beginning December 31, 2013 and on December 31 every three years other taxable benefits, with or without regard to a payroll period.
thereafter, the compensation threshold shall be adjusted to its present For purposes of determining the compensation threshold under Section 3
value using the Philippine Consumer Price Index (CPI), as published by (b) of these regulations, gross compensation shall not include retirement
the National Statistics Office. The adjusted compensation, shall take effect and/or separation pay/benefits (whether or not taxable), as well as items
not earlier than the first day of the calendar month immediately following considered as de minimis benefits. Provided that the foregoing shall be
the issuance of a corresponding Revenue Memorandum Circular (RMC) considered in determining the income tax due at the time of the
on the matter. employee's retirement or separation.

For clarity in the implementation hereof, the formula for determining the SECTION 5. Manner of Computation of Tax. — At the start of the
adjusted compensation threshold shall be: year or at the start of the employee's employment, as the case may be, it
is important to determine whether the employee shall receive, or is due to
Adjusted Previous CPI for the current year receive under a contract of employment, a gross annual compensation
threshold = threshold x –––––––––––––––––– equivalent to or above the compensation threshold stated in Section 3 (b)
––––––––––––– of these regulations. The determination should, as far as practicable,
amount amount CPI for the previous revaluation include both regular taxable compensation income and supplementary
year compensation income.

(c) Exclusivity Test — The Filipino managerial or technical The withholding tax regime applicable to employees who opted to
employee must be exclusively working for the RHQ or ROHQ as a subjected to the fifteen percent (15%) final withholding tax rate is different
regular employee and not just a consultant or contractual from the withholding tax on compensation imposable on regular
personnel. Exclusivity means having just one employer at a time. employees. This is primarily evidenced by the reporting requirements for
final withholding tax (BIR Form No. 1601-F), applicable to employees
SECTION 4. Gross Compensation. — Under Section 2.78.1 (A) of subject to the final withholding tax of fifteen percent (15%), as
RR No. 2-98, as amended, gross compensation includes salaries, wages, differentiated from the reporting requirements for withholding tax on
emoluments and honoraria, allowances, commissions and fees (including compensation (BIR Form No. 1601-C).
director's fees if the director is at the same time an employee of the
employer), taxable bonuses, and fringe benefits (except those that are Consequently, where an employee who is subject to the fifteen percent
subject to fringe benefits tax). (15%) final withholding tax rate works for more than one employer which

INCOME TAX
MONTERO // 2A TAX DIGESTS
ARCAINA • AUSTRIA • BAÑADERA • BANTA • BELLO • BUGAY • CARAAN • CHENG • COLOQUIO • CUALOPING • DE LUIS • DIPLOMA • FAJARDO • GO
LIM, J. • LIM, Q. • LUNA • ONG • PASCUAL • PEREZ • REGIS • REYES • TRIAS • TUAZON • VANSLEMBROUCK • VILLARIN, L. • VILLARIN, P. • VILLARIVERA

are both ROHQs or RHQs at any one time in a taxable year, then such withhold income tax at the rate of 15% of gross income. It is immaterial
employers need not annualize the employees compensation. The that he may receive a bonus of an indeterminate amount because his
annualized withholding method as provided under Section 2.79 (B) (5) (b) regular compensation income already places him above the compensation
of RR No. 2-98, as amended, will only apply the case of employees, threshold of PhP975,000.00. Thus, the employer should, in addition to the
having more than one employer in a calendar year, whose income is other reportorial requirements stated in Section 7 hereof, accomplish the
subject withholding tax on compensation. On the other hand, when during Monthly Remittance Return of Final Income Taxes Withheld (BIR Form
the same year, an employee is subject to both the fifteen percent (15%) No. 1601-F) and the Annual Information Return of Income Taxes Withheld
final withholding tax rate and the regular income tax rate, then the on Compensation and Final Withholding Taxes (BIR Form No. 1604-CF).
employer under whom the employee is subject to the regular income tax
rates shall annualize that employee's compensation that was subject to EXAMPLE 2: At the start of the year, Mr. A, a Filipino employed by an
the regular income tax rates. ROHQ, receives a monthly salary and cost of living allowance in the
amount of PhP65,000.00 and PhP5,000.00 respectively. His employment
The determination of whether or not the employee qualifies for the final contract also states that he may receive a performance bonus at the end
withholding tax rate of fifteen percent (15%) is shall be made on a yearly of the year which amount is not presently determinable. Since Mr. A's
basis. regular compensation income of PhP905,000.00 composed of
PhP780,000.00 (PhP65,000.00 x 12 months) basic pay, PhP65,000.00
In cases where the total compensation cannot be determined at the start 13th month pay and Php60,000.00 (PhP5,000.00 x 12 months) cost of
of the year or employment, the option to be taxed at fifteen percent (15%) living allowance, is below the compensation threshold of PhP975,000.00
cannot be exercised. then his employer shall, on every pay period from the start of the year
withhold from Mr. A income tax at the regular rate of withholding tax on
EXAMPLE 1: At the start of the year, Mr. A, a Filipino holding a compensation. However, if at the end of the year Mr. A receives a
managerial position in an RHQ, receives a monthly salary and cost of performance incentive bonus of PhP100,000.00, thus making his annual
living allowance in the amount of PhP70,000.00 and PhP7,000.00 gross compensation income total PhP1,005,000.00 and he opts to be
respectively. His employment contract also states that he may receive a taxed at the rate of 15% of his gross income, his employer shall make the
performance bonus at the end of the year which amount is not presently necessary adjustments to the income tax rate.
determinable. Since Mr. A is due to receive, under an employment
contract, a regular taxable compensation income of PhP994,000.00 More particularly:
composed of PhP840,000.00 (PhP70,000.00 x 12 months) basic pay, a. The employer shall refund to the employee the excess of the tax
PhP70,000.00 13th month pay and PhP84,000.00 (PhP7,000.00 x 12 withheld at the regular rate of withholding tax on compensation over
months) cost of living allowance, placing him above the compensation the tax required to be withheld at the rate of 15% of gross income;
threshold of PhP975,000.00, then he has the option to be taxed at the rate b. The adjustment for the excess tax withheld at the regular income tax
of 15% of his gross income or at the regular income tax rate. rate shall be reflected in the Monthly Remittance Return of Income
Taxes Withheld on Compensation (BIR Form No. 1601-C) for the
Since the employer knows that the annual gross compensation of the month of December;
employee is above the compensation threshold of PhP975,000.00 at the c. The tax required to be withheld at the rate of 15% of gross income
start of the year, then the employer may, at the option of the employee, shall be reported in the Monthly Remittance Return of Final Income

INCOME TAX
MONTERO // 2A TAX DIGESTS
ARCAINA • AUSTRIA • BAÑADERA • BANTA • BELLO • BUGAY • CARAAN • CHENG • COLOQUIO • CUALOPING • DE LUIS • DIPLOMA • FAJARDO • GO
LIM, J. • LIM, Q. • LUNA • ONG • PASCUAL • PEREZ • REGIS • REYES • TRIAS • TUAZON • VANSLEMBROUCK • VILLARIN, L. • VILLARIN, P. • VILLARIVERA

Taxes Withheld (BIR Form No. 1601-F) for the month of December; Mr. A has the option to be taxed at 15% of gross income for his
and employment under his first employment because Mr. A was due to
d. The adjustments will also be summarized in the Annual Information receive, under a contract of employment, an amount in excess of the
Return of Income Taxes Withheld on Compensation (BIR Form No. compensation threshold of PhP975,000.
1601-C) and Final Withholding Taxes (BIR Form No. 1604-CF). If under his second employment with another ROHQ within the same year,
Mr. A's annual compensation is below the threshold, then the regular
The above requirement shall be in addition to the other reportorial income tax rates will apply to his compensation under his second
requirements stated in Section 7 herein. employment.
The resulting aggregate excess remittance by the ROHQ/RHQ of There is no need for the second employer to consolidate Mr. A's income
withholding compensation (WC) shall be credited and applied in the from his previous employer (where Mr. A qualified for the tax rate of 15%
succeeding month/s withholding tax remittances (WC) only until fully of gross income) which was under a different tax regime.
applied and utilized.
EXAMPLE 5: Mr. A, a Filipino employed by a regional area
EXAMPLE 3: Mr. A, a Filipino employed by a regional area headquarters in the Philippines begins his employment at the start of the
headquarters in the Philippines begins his employment on June 1. His year. His contract stipulates that he shall receive an annual compensation
employment contract stipulates that he shall receive an annual of PhP988,000.00. Since this amount is above the compensation
compensation of PhP975,000.00 inclusive of 13th month pay. At the end threshold criteria, his employer shall, at the option of Mr. A, withhold
of the year, he would have received only Php568,750.00, composed of income tax at the rate of 15% of gross income. However, at the end of
PhP525,000.00 (PhP975,000.00/13 x 7 months) basic pay and June, for one reason or another (e.g., reduction of compensation due to
PhP43,750.00 (PhP975,000.00/13 x 7/12 months) 13th month pay. business reverses), Mr. A's compensation is reduced such that his annual
However, since his employment contract states that he shall receive an compensation will be reduced to an amount that is less than the
annual compensation of PhP975,000.00, whether he actually receives this compensation threshold.
or not, then his employer shall, at the option of Mr. A, withhold income tax
at the rate of 15% of actual gross compensation received. In this case, while the final withholding tax rate was applied to Mr. A during
the year, an adjustment should be made at the end of the year subjecting
EXAMPLE 4: Mr. A, a Filipino employed by a regional area the entire annual compensation of Mr. A to the regular income tax rates.
headquarters in the Philippines begins his employment at the start of the The employer should make the necessary adjustments at the end of the
year. His contract stipulates that he shall receive an annual compensation year in the following forms:
of PhP988,000.00, inclusive of 13th month pay. Since this amount is 1. BIR Form No. 1601-C for the correct taxes to be withheld at the
above the compensation threshold his employer shall, at the option of Mr. regular income tax rates; and
A, withhold income tax at the rate of 15% of gross income. However, at 2. BIR Form No. 1601-F for excess taxes withheld and for over-
the end of June, Mr. A leaves his job for employment with another ROHQ. remittance;
At this time, Mr. A would have received total compensation of 3. Annual Information Return of Income Taxes Withheld on
Php494,000.00 composed of PhP456,000.00 (988,000.00/13 x 6 months) Compensation and Final Withholding Taxes (BIR Form No. 1604-
basic pay and PhP38,000.00 (988,000.00/13 x 6/12 months) 13th month CF).
pay. The resulting excess remittance of fifteen percent (15%) final withholding

INCOME TAX
MONTERO // 2A TAX DIGESTS
ARCAINA • AUSTRIA • BAÑADERA • BANTA • BELLO • BUGAY • CARAAN • CHENG • COLOQUIO • CUALOPING • DE LUIS • DIPLOMA • FAJARDO • GO
LIM, J. • LIM, Q. • LUNA • ONG • PASCUAL • PEREZ • REGIS • REYES • TRIAS • TUAZON • VANSLEMBROUCK • VILLARIN, L. • VILLARIN, P. • VILLARIVERA

tax, if any shall be credited and applied in the succeeding month/s fifteen the beginning of the year. During the year, Mr. A is employed by ROHQ 2.
percent (15%) final withholding tax only under ATC Code WI 320 and not His new contract provides for a gross annual compensation that meets the
against any other form of final tax remittances. Crediting shall be allowed compensation threshold.
only against the same type of final tax (ATC Code WI 320) until fully For ROHQ 1, the applicable tax rate would be the regular tax on
applied and utilized. compensation income. For ROHQ 2, at the option of Mr. A, the applicable
tax rate would be the final withholding tax rate of 15% of gross income.
EXAMPLE 6: Mr. A, Filipino employed by a ROHQ is a manager of the There is no need for ROHQ 2 to consolidate Mr. A's income from his
company for a long time now. His contract stipulates that he shall receive previous employer (ROHQ 1) since this was covered under a different tax
an annual compensation of PhP888,000.00. During the year, he received regime. However, if Mr. A, did not opt to be taxed using the 15%
an increase in his salary which brings him now to more than the annual preferential rate, he will be subjected to regular income tax rate on
compensation threshold of Php975,000. Because of the salary increase, compensation in which case there is a need to consolidated compensation
he is now qualified to exercise the option to be taxed at the rate of 15% of earnings from ROHQ 1 and ROHQ 2 for a proper year-end adjustments on
his gross income. If Mr. A opts to be subject to the 15% preferential rate, compensation.
he shall be covered by said 15% rate from the effectivity of his salary
increase. However, his previous compensation (prior to the salary EXAMPLE 9: Mr. A is an employee of ROHQ 1 at the start of the year.
increase) shall remain to be subjected to the regular income tax rate. The His annual gross compensation meets the compensation threshold at the
same rules apply in instances of promotions made during the year where beginning of the year. During the year, Mr. A is employed by ROHQ 2. His
a promotion or change in job assignment qualifies the Filipino manager or new contract provides for a gross annual compensation that is below the
technical employee to exercise the option to be taxed at 15% preferential compensation threshold.
rate. For purposes of ROHQ 1, at the option of Mr. A, the applicable tax rate
would be the final tax of 15% of gross income.
EXAMPLE 7: Mr. A is an employee of ROHQ 1 at the start of the year. For purposes of ROHQ 2, the applicable tax rate would be the regular
His annual gross compensation meets the compensation threshold at the income tax on compensation income. ROHQ 2 shall be required to
beginning of the year. During the year, Mr. A is employed by ROHQ 2. His annualize such regular income but there is no need for ROHQ 2 to
new contract provides for a gross annual compensation that meets the consolidate Mr. A's income from ROHQ 1, since this was covered under a
compensation threshold. different tax regime.
In this case, Mr. A is subject to the final withholding tax rate of 15% of
gross income for both the ROHQ 1 and ROHQ 2. However, there is no EXAMPLE 10: At the start of the year, Mr. A is an employee of ROHQ 1.
need to annualize Mr. A's income from either ROHQ 1 or 2 because the His annual gross compensation at ROHQ 1 did not meet the
annualized withholding tax method does not apply to the final withholding compensation threshold at the beginning of the year. During the year, Mr.
tax regime. Mr. A will not be required to file an annual ITR consolidating A left ROHQ 1 and transferred to ROHQ 2. His new contract provides for a
his income for the year under both employment which is subject to final gross annual compensation that is likewise below the compensation
withholding tax. threshold.
For purposes of ROHQ 1, the applicable tax rate would be the regular
EXAMPLE 8: Mr. A is an employee of ROHQ 1 at the start of the year. income tax rates.
His annual gross compensation is below the compensation threshold at For purposes of ROHQ 2, the applicable tax rate would still be the regular

INCOME TAX
MONTERO // 2A TAX DIGESTS
ARCAINA • AUSTRIA • BAÑADERA • BANTA • BELLO • BUGAY • CARAAN • CHENG • COLOQUIO • CUALOPING • DE LUIS • DIPLOMA • FAJARDO • GO
LIM, J. • LIM, Q. • LUNA • ONG • PASCUAL • PEREZ • REGIS • REYES • TRIAS • TUAZON • VANSLEMBROUCK • VILLARIN, L. • VILLARIN, P. • VILLARIVERA

income tax on compensation income. However, ROHQ 2 shall be required employee meets the compensation threshold.
to annualize such regular income for purposes of making a year-end
adjustment for withholding on compensation. Even if the total SECTION 6. Imposition of Fringe Benefits Tax. — The determinant
compensation income of Mr. A, when annualized, would exceed the test whether a Filipino employee has the option to avail of the fifteen
compensation threshold, Mr. A's income would still remain under the percent (15%) preferential rate as a manager or technical employee is
regular income tax regime and will not change to the 15% final income tax independent of the criteria in the imposition of fringe benefits tax under
regime. Section 33 of the Tax Code, as implemented by Revenue Regulations No.
3-98, as amended.
EXAMPLE 11: Mr. A is a long-serving employee of an ROHQ. He is an Pursuant to Revenue Regulations No. 3-98, the term, "RANK AND FILE
executive secretary to the General Manager for which he receives an EMPLOYEES" means all employees who are holding neither managerial
annual compensation of PhP988,000.00. nor supervisory position. On the other hand, the Labor Code of the
Even if Mr. A's annual gross compensation is above the compensation Philippines, as amended, defines "MANAGERIAL EMPLOYEE" as one
threshold of PhP975,000.00, he does not qualify for the rate of 15% on who is vested with powers or prerogatives to lay down and execute
gross income because he is neither exercising managerial nor technical management policies and/or to hire, transfer, suspend, lay-off, recall,
functions. discharge, assign or discipline employees; while "SUPERVISORY
EMPLOYEES" are those who, in the interest of the employer, effectively
EXAMPLE 12: Mr. A, a Filipino employed by a regional area recommend such managerial actions if the exercise of such authority is
headquarters in the Philippines receives a monthly salary and cost of not merely routinary or clerical in nature but requires the use of
living allowance in the amount of PhP65,000.00 and PhP5,000.00, independent judgment.
respectively. His employment contract also states that he may receive a Inasmuch as the option to be subject to fifteen percent (15%) preferential
performance bonus at the end of the year the amount is not yet presently rate and the coverage of fringe benefits tax are independent of each other,
determinable. Since Mr. A's regular compensation income of there would be instances where a Filipino employee shall enjoy a fifteen
PhP905,000.00 composed of PhP780,000.00 (PhP65,000.00 x 12 percent (15%) preferential rate as a technical employee but may not be
months) basic pay, PhP65,000.00 13th month pay, and Php60,000.00 covered by the fringe benefits tax not being a supervisory employee.
(PhP5,000.00 x 12 months) cost of living allowance, is below the
compensation threshold of PhP975,000.00, then his employer shall, on SCENARIO 1: Mr. A is a General Manager of an ROHQ. He is expected
every pay period from the start of the year, withhold from Mr. A income tax to receive an annual compensation of PhP988,000.00. He will likewise
at the regular rate of withholding tax on compensation. receive PhP200,000 fringe benefits for the year.
During the year, Mr. A either retires, or is separated from work. He Mr. A's annual gross compensation is above the compensation threshold
receives a retirement or separation pay of PhP100,000.00, thus making of PhP975,000.00, he opted for the fifteen percent (15%) final preferential
his annual gross compensation income for the year in the total amount of rate.
PhP1,005,000.00. Notwithstanding that Mr. A's annual gross As he opted for the fifteen percent (15%) final preferential tax rate, his
compensation now exceeds the compensation threshold, Mr. A shall be fringe benefits shall likewise be subjected to the fifteen percent (15%) tax
subject to income tax at the regular rate of withholding tax on rate which shall be imposed on the grossed-up monetary value of the
compensation, since retirement and/or separation pay, whether or not fringe benefit. The said tax base shall be computed by dividing the
subject to tax, shall not be considered in determining whether an monetary value of the fringe benefit by eighty-five percent (85%).

INCOME TAX
MONTERO // 2A TAX DIGESTS
ARCAINA • AUSTRIA • BAÑADERA • BANTA • BELLO • BUGAY • CARAAN • CHENG • COLOQUIO • CUALOPING • DE LUIS • DIPLOMA • FAJARDO • GO
LIM, J. • LIM, Q. • LUNA • ONG • PASCUAL • PEREZ • REGIS • REYES • TRIAS • TUAZON • VANSLEMBROUCK • VILLARIN, L. • VILLARIN, P. • VILLARIVERA

SECTION 7. Reporting Requirements. — For a Filipino managerial
SCENARIO 2: Mr. B, is a General Manager of an ROHQ, is expected to or technical employee to have the option to be taxed at fifteen percent
receive an annual compensation of PhP888,000.00. He will likewise (15%) of his or her gross income, it shall no longer be necessary for the
receive PhP100,000 fringe benefits for the year. RHQ or ROHQ to file a request for ruling with the BIR National Office.
Mr. B's annual gross compensation is below the compensation threshold Instead, the RHQ or ROHQ must file the following documents with the
of PhP975,000.00. The fringe benefits subject to fringe benefits tax are not Revenue District Office having jurisdiction over it or, for ROHQs or RHQs
included in determining gross compensation as defined under Section 4 of that are considered large taxpayers, with the LT Assistance Division/LT
these regulations; thus, he does not qualify for the rate of fifteen percent Regulatory Division/LTDOs:
(15%) final preferential income tax rate on gross income but the same will
be subjected to regular income tax rate. a. Declaration of Employees' Availment of the 15% Preferential Tax
Moreover, being a manager, a fringe benefits tax of thirty two percent Rate of every qualified employee (BIR Form No. 1947 herein
(32%) shall be imposed on the grossed-up monetary value of his fringe attached as Annex "A")
benefit. The said tax base shall be computed by dividing the monetary Declaration of Employees' Availment of the 15% Preferential Tax
value of the fringe benefit by sixty eight percent (68%). Rate shall be filed within 15 days from the date of effectivity of this
Revenue Regulations, for employees currently employed with ROHQ
SCENARIO 3: Mr. C is a long-serving employee of an ROHQ. He is an or RHQ or within 15 days from the date of employment for those who
executive secretary to the General Manager for which he is receiving an will just be employed. Thereafter, the filing shall only be made
annual compensation of PhP988,000.00. He is likewise receiving whenever there are changes in the employment status of the
PhP100,000 fringe benefits. employee (i.e., change of employer, change in salary package,
Even if Mr. C's annual gross compensation is above the compensation promotion) in which case the newly accomplished BIR Form must be
threshold of PhP975,000.00, he does not qualify for the rate of fifteen submitted not later than January 31st of the succeeding year.
percent (15%) on gross income because he is neither exercising b. Employer's sworn declaration, stating under oath:
managerial nor technical functions. Thus, he is subject to the regular i. the names of its employees who received, or are due to receive,
income tax on both his compensation income and fringe benefits. under an employment contract, a gross annual compensation
equivalent to or more than PhP975,000.00 or its adjusted amount;
SCENARIO 4: Mr. D is a technical employee for which he receives an ii. the inclusive dates for the relevant calendar year when the
annual compensation of PhP988,000.00. He likewise receives employee received, or are due to receive, gross annual
PhP100,000 fringe benefits for the year. compensation equivalent to or more than PhP975,000.00 or its
Mr. D's annual gross compensation is above the compensation threshold adjusted amount;
of PhP975,000.00, hence he is qualified for the rate of fifteen percent iii. that the employees received compensation solely from the
(15%) on gross income. ROHQs or RHQs and not from the company of which it is a
However, he is not subject to fringe benefits tax as he is neither exercising branch, or from any other entity which may be an affiliate or
managerial or supervisory function, thus he is subject to the fifteen percent subsidiary of the said company; and
(15%) preferential income tax rate on both his compensation and fringe iv. that such employees exercise managerial or technical functions.
benefits. c. Employee's sworn declaration, stating under oath:
i. his complete name, Taxpayer Identification Number (TIN);

INCOME TAX
MONTERO // 2A TAX DIGESTS
ARCAINA • AUSTRIA • BAÑADERA • BANTA • BELLO • BUGAY • CARAAN • CHENG • COLOQUIO • CUALOPING • DE LUIS • DIPLOMA • FAJARDO • GO
LIM, J. • LIM, Q. • LUNA • ONG • PASCUAL • PEREZ • REGIS • REYES • TRIAS • TUAZON • VANSLEMBROUCK • VILLARIN, L. • VILLARIN, P. • VILLARIVERA

ii. job title and brief job description and responsibility; the National Internal Revenue Code, as amended, shall be charged
iii. the equivalent amount of gross annual compensation which he against any person who is discovered to have committed any false
received or is due to receive must be at least PhP975,000.00 or declaration or misrepresentation.
its adjusted amount;
iv. the inclusive dates of the calendar year when he received or is SECTION 9. Transitory Provisions. — In as much as this regulations
due to receive gross annual compensation of at least was issued later in the year, the following transitory provisions shall apply:
PhP975,000.00 or its adjusted amount; a. Coverage:
v. that he is exclusively employed by the ROHQ or RHQ; The transitory provision shall cover compensation payments
vi. that he does not have any other employer other than the ROHQ made from January 1, 2010.
or RHQ;
vii. that he does not receive compensation from sources other than b. Deadline for Adjustments:
the ROHQ or RHQ where he is employed; and All affected taxpayers are allowed to make necessary
viii. that he exercises managerial or technical functions. adjustments in their withholding tax remittances (withholding tax on
The declarations mentioned in subsections b & c above must be compensation or fifteen percent (15%) final withholding tax on
submitted not later than January 31st of the succeeding year. compensation) without penalties, but in no case beyond January 31,
d. Monthly Remittance Return of Final Income Taxes Withheld (BIR 2011. However, compliance to existing rules and regulations on the
Form No. 1601-F) and Annual Information Return of Income Taxes availment of abatement of penalties should be complied by the
Withheld on Compensation and Final Withholding Taxes (BIR Form ROHQ/RHQ.
No. 1604-CF) shall be filed within the applicable time periods and in
the manner set forth in Sections 2.58 (A) (1) & (2) and 2.83.2 of RR c. Manner of declaring adjustments:
No. 2-98, as amended. The employer's Annual Information Return of To properly segregate and isolate adjustments to be made on
Income Taxes Withheld on Compensation and Final Withholding withholding tax on compensation or fifteen percent (15%) final
Taxes (BIR Form No. 1604-CF) shall have an additional schedule to withholding tax, all taxpayers affected are required to file an amended
reflect declaration of information pertaining to employees covered by BIR Form 1601C and/or BIR Form 1601F to cover adjustments
the fifteen percent (15%) preferential tax regime. The revised format necessary as a result of these regulations.
of BIR Form 1604-CF shall be covered by a separate Revenue
Memorandum Order (RMO). d. Rules/Guidelines in changes in classification of employee:
In case of failure to file any of the requirement stated under this Section or 1. For employees qualified and opted to avail the fifteen percent (15%)
the filing of false information, the regular income tax shall be imposed on preferential rate under these regulations but was covered by regular
the employee. withholding tax on compensation:

SECTION 8. Penalty Clause. — Any person who willfully files a The employer is required:
declaration, return or statement containing information which is not true a. To re-compute the appropriate fifteen percent (15%) final tax on
and correct as to every material matter shall, upon conviction, be subject compensation paid from January 1, 2010.
to the penalties prescribed for perjury under the Revised Penal Code. b. File amended BIR Forms 1601-F to reflect the monthly
Moreover, any and all applicable criminal offense (e.g., tax evasion) under adjustments covering the fifteen percent (15%) final tax on

INCOME TAX
MONTERO // 2A TAX DIGESTS
ARCAINA • AUSTRIA • BAÑADERA • BANTA • BELLO • BUGAY • CARAAN • CHENG • COLOQUIO • CUALOPING • DE LUIS • DIPLOMA • FAJARDO • GO
LIM, J. • LIM, Q. • LUNA • ONG • PASCUAL • PEREZ • REGIS • REYES • TRIAS • TUAZON • VANSLEMBROUCK • VILLARIN, L. • VILLARIN, P. • VILLARIVERA

compensation paid to qualified/availing Filipino individuals from ATC Code WI 320 and not against any other form of final tax
January 1, 2010 and every month thereafter. Please note that the remittances. Crediting shall be allowed only against the same
appropriate ATC Code to be used in BIR Form 1601-F should be type of final tax (ATC Code WI 320), i.e., only for transactions
WI 320 for payments to qualified Filipinos or aliens employed in covered by the transitory provisions of these regulations and only
an RHQ or ROHQ. until fully applied and utilized.
c. File amended BIR Forms 1601-C to correct the monthly
declarations for withholding tax on compensation from January 1, 3. For employees who are no longer in the employ of the ROHQ or RHQ,
2010 and every month thereafter. i.e., all those managerial or technical employees no longer working with
d. Refund to the employee concerned any differential withholding tax the current ROHQ or RHQ at the time of approval of these regulations,
made (regular withholding compensation for the regular income their original withholding tax classification (regular or fifteen percent (15%)
tax vis-a-vis fifteen percent (15%) final tax on compensation). final tax as the case may be, made by the ROHQ or RHQ's payroll master)
e. The resulting aggregate excess remittance by the ROHQ/RHQ of shall be deemed correct and shall no longer be re-evaluated or
withholding compensation (WC) shall be credited and applied in reclassified in accordance with these regulations.
the succeeding month/s withholding tax remittances (WC) until
fully utilized. 4. The employer must file a Sworn listing of compensation payment
subjected to adjustment as a result of these regulations following the
2. For employees not qualified to avail the fifteen percent (15%) herein listing format:
preferential rate but was still subjected thereto instead of the regular
withholding tax on compensation:
The employer is required:

a. To re-compute for appropriate withholding tax on compensation
on salary payments made from January 1, 2010.
b. File amended BIR Forms 1601-C to correct the monthly
declarations for withholding tax on compensation from January 1,
2010 and monthly thereafter.
c. File amended BIR Forms 1601-F to reflect the monthly
adjustments covering the fifteen percent (15%) final tax on !
compensation paid to qualified/availing Filipino individuals from
January 1, 2010 and monthly thereafter. Please note that the
appropriate ATC Code to be used in BIR Form 1601-F should be
WI 320 for payments to qualified Filipinos or aliens employed in
RHQ or ROHQ.
d. The resulting excess remittance of fifteen percent (15%) final
withholding tax shall be credited and applied in the succeeding
month/s fifteen percent (15%) final withholding tax only under

INCOME TAX
MONTERO // 2A TAX DIGESTS
ARCAINA • AUSTRIA • BAÑADERA • BANTA • BELLO • BUGAY • CARAAN • CHENG • COLOQUIO • CUALOPING • DE LUIS • DIPLOMA • FAJARDO • GO
LIM, J. • LIM, Q. • LUNA • ONG • PASCUAL • PEREZ • REGIS • REYES • TRIAS • TUAZON • VANSLEMBROUCK • VILLARIN, L. • VILLARIN, P. • VILLARIVERA

!
SECTION 10. Repealing Clause. — All Orders, memoranda and other
revenue issuances inconsistent with these regulations are hereby
revoked, modified or amended accordingly.

SECTION 11. Effectivity. — These Revenue Regulations shall take
effect immediately.

INCOME TAX