New rule on the 15% tax on Filipinos in RHQs, ROHQs

New rule on the 15% tax on Filipinos in RHQs, ROHQs by: Farrah Andres-Neagoe

It may be recalled that prior to the issuance of RR 11-2010, there was confusion regarding the definition of the term “managerial and technical positions,” as well as the coverage of the 15% preferential tax treatment, i.e. whether or not Filipino employees employed by RHQs and ROHQs should occupy both managerial and technical positions in order to qualify for the 15% preferential tax treatment.

With the recent issuance of RR 11-2010, these issues have been finally resolved.  According to the BIR, Filipinos employed by RHQs and ROHQs need not be occupying both managerial and technical positions to qualify for the preferential tax rate. Either one position suffices for entitlement to the 15% preferential tax rate.

Three tests were laid down for Filipinos employed by RHQs or ROHQs of multinational companies to be entitled to the 15% preferential tax rate. They are as follows:

       1. Position and function test - Employees must occupy, and actually exercise the functions of, a managerial or technical position.

       2. Compensation threshold test – Employees must have received or are due to receive under a contract of employment a gross annual taxable compensation of at least P975,000 under the employment contract. If the Filipino employee subsequently receives less than P975,000.00 annual taxable compensation income, he/she shall become subject to the regular income tax rate starting the calendar year when the change becomes effective.

       3. Exclusivity test – Employees must exclusively work for the RHQ or ROHQ, and should not be a consultant or contractual personnel.

With these three tests set forth in RR 11-2010, the entitlement to the 15% preferential tax rate became clear and unambiguous.

Furthermore, the RHQs/ROHQs need not file a request for BIR ruling to confirm the eligibility of the Filipino employees. Instead, the company only needs to file the following reportorial requirements:

        1. Declaration of employees’ availment of the 15% preferential tax rate of every qualified employee (BIR Form 1947)

        2. Employer’s sworn declaration under oath stating that the names of employees who received or are due to receive under a contract of employment a gross annual compensation equivalent to or more than P975,000, including the relevant dates when the compensation was received or are due to be received and that the employee received the compensation solely from the RHQ or ROHQ

        3. Employee’s sworn declaration under oath specifying his personal information details and all the relevant facts entitling him/her to the preferential tax rate of 15%; and

        4. Monthly remittance return of BIR Form No. 1601-F and 1604-CF, including a schedule to reflect the declaration of information pertaining to employees covered by 15% preferential tax rate

In addition, RR 11-2010 stressed the importance of determining at the start of the year whether employees shall receive or are due to receive gross annual compensation equivalent to or more than the compensation threshold (i.e., P975,000) since the option to be taxed at 15% cannot be exercised if the determination cannot be had at the beginning of the taxable year.

It is also worthy to note that the withholding tax regime applicable to employees who opted for the 15% final withholding tax rate is different from the withholding tax on compensation imposable on regular employees. This is evidenced by the difference in the reportorial requirements required in each withholding tax regime. Under the final withholding tax regime, if the employee works for more than one employer (RHQ or ROHQ) at any one time in a taxable year, the employer need not annualize the compensation of the employee. This, however, is not the case when the employees are subject to withholding tax on compensation.

The provisions of RR-2011 shall apply to compensation paid beginning January 1, 2010.  

Consequently, if an employee is qualified but was subjected to regular tax or is not qualified but was given the 15% preferential rate, the employer shall make necessary re-computations and refund/collect the tax as part of annualization. Hence, the RHQ and ROHQs should amend, if any, BIR Forms 1601-C and 1601-F on or before January 31, 2011 to avoid penalties.

Furthermore, any excess of the 15% final withholding tax collected cannot be credited against other taxes but can only be credited against future final withholding tax to be remitted to the BIR.

Moreover, no adjustments shall be required if an employee is no longer connected with the RHQ or ROHQ at the time of the approval of the regulation as their original withholding tax classification shall be deemed correct.