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Posts Tagged ‘incorporation’

01
July

Tax Savings on Regional Operating Headquarters

By: Garry S. Pagaspas

Under Section 2(3) of Republic Act  No. 8756, Regional Operating Headquarters (ROHQ)  is defined as a foreign business entity which is allowed to derive income in the Philippines by performing the following qualifying services to its affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific Region and in other foreign markets:

  1. general administration and planning
  2. business planning and coordination
  3. sourcing and procurement of raw materials and components
  4. corporate finance advisory services
  5. marketing control and sales promotion
  6. training and personnel management
  7. logistic services
  8. research and development services and product development
  9. technical support and maintenance
  10. data processing and communication, and,
  11. business development

An ROHQ is actually a foreign corporation that is licensed to do business in the Philippines to strictly engage in the above specific and limited services. It shall offer its services only to its affiliates, branches or subsidiaries, as declared in its registration with the SEC. It shall not directly and indirectly solicit or market goods and services whether on behalf of their mother company, branches, affiliates, subsidiaries or any other company. In same manner, it cannot directly or indirectly engage in the sale and distribution of goods and services of its mother company, branches, affiliates, subsidiaries or any other company.

How Tax Savings Operates

The above strict and limited operations of an ROHQ has a tax purpose. To my mind, tax savings is the end view of the restrictions and hereunder are the material tax considerations for the use of ROHQ:

  • Special income tax rate of 10% of their taxable income. As compared to a Philippine branch tax at 30%, ROHQ structure is a 20% advantage.
  • Special alien employee tax of 15% based on gross compensation applicable to managerial or technical alien employees of ROHQ.  An employee is normally taxed at 5-32% of taxable net income after deducting personal exemptions allowed under certain conditions (p50,000.00 basic personal exemptions, and P25,000.00 personal exemptions for every qualified dependent child up to four or maximum of P100,000.00 in a year). This is a final withholding tax and the expatriate employee may no longer need to file annual income tax return.
  • 15% special alien tax applies to Filipinos holding similar managerial or technical positions as that of expat employees. For the purpose, the tax authorities – Bureau of Internal Revenue (BIR) provides the following requirements under Revenue Regulations No. 11-2010 issued on October 26, 2010 (Click to view regulation):
  1. Position and function test as a managerial or technical employee by actual exercise of such nature of work and not simply by designation of position in ROHQ
  2. Compensation threshold test where gross annual taxable income of at least P975,000.00 (US$22,674.42@P43/US$) or approximately P81,250 (US$1,889.53@P43/US$) a month.
  3. Exclusivity test or that the employee must be exclusively an employee servicing a single ROHQ.
  4. Filing of BIR Form No. 1947 for declaration. (Click to view Form)
  • 15% branch profit remittance tax upon remittance of the operational income derived from Philippine sources by the ROHQ to its head office abroad. While this may be of similar rate to inter-corporate dividend tax of non-resident foreign corporation, this, does not require a tax treaty relief (TTRA) from the International Tax Affairs Division (ITAD) Ruling from the BIR.

Other tax implications of ROHQ would be similar to the rest. It is subject to 12% VAT for services rendered in the Philippines, and zero-rating for services to related party clients abroad under certain conditions.

ROHQ Registration in the Philippines

After having learned of the above tax savings and advantages, your next move is to make a complete registration of an ROHQ in the Philippines. Since ROHQ is a foreign corporation licensed to do business in the Philippines, you need to choose a parent company with affiliates, subsidiaries or branch office in the Asia pacific region. Some uses a Hong Kong company, or a Singaporean company for ease of set-up perhaps. But you can use one from other foreign countries of choice. Hereunder are the common registration requirements:

  1. Name verification slip with the name of the foreign corporation hyphenated with – Philippine regional operating headquarters. P40.00 for every 30 day reservation up to ninety (90) days, subject to extension;
  2. Endorsement from the Board of Investments;
  3. Certification from the Philippine Consulate/Embassy or from Philippine Commercial Office, or from the equivalent office of the DTI in the foreign country that said applicant is an entity engaged in the international trade with affiliates, subsidiaries or branch offices in the Asia Pacific region and other foreign markets; and
  4. Authenticated certification from the principal officer (e.g. secretary’s Certificate) of the foreign company to the effect that the foreign company had been authorized by its Board of Directors or governing body to establish ROHQ in the Philippines, appointing a resident agent, and authorizing opening a treasurer-in-trust account (TITF) account in the Philippines and appointing an authorized representative for the purpose;
  5. Initial capitalization and remittance of US$200,000 or its Peso equivalent evidenced by Certificate of Inward Remittance and Certificate of Bank Deposit from the bank where the TITF account has been opened;
  6. Appointment of resident agent to act as the point person for formal communications in the Philippines.

Upon approval and release of the License to Do Business in the Philippines by the SEC, registration with the following agencies would follow:

  • Bureau of Internal Revenue (BIR) for tax compliance registration;
  • Business Permits and Licenses from the Local Government Unit (LGU) of location;
  • Social Security System registration for mandatory social security benefits of its employees;
  • Philippine Health Insurance Corporation (PHIC or PhilHealth) for mandatory health benefits of its employees;
  • Home Development Mutual Fund (HDMF) for mandatory housing benefits of its employees
  • Foreign investments registration with the Central Bank of the Philippines, if applicable

Summary

The above discussion would mean that if the intended market of services of the proposed entity are related parties abroad, ROHQ is a good choice because of its income producing nature from its services and the tax perks attached to it. Process may take a while, approximately thirty (30) days from date of SEC approval and release of License to do Business.


(Garry S. Pagaspas is a Resource Speaker with Tax and Accounting Center, Inc. He is a Certified Public Accountant and a degree holder in Bachelor of Laws engaged in active tax practice for more than seven (7) years now and a professor of taxation for more than four (4) years now. He had assisted various taxpayers in ensuring tax compliance and tax management resulting to tax savings rendering tax studies, opinions, consultancies and other related services. He has likewise assisted a number of investors in the Philippine structure and in the complete registration of the same with the various government agencies in the Philippines. For comments, you may please send mail at garry.pagaspas@taxacctgcenter.org.)

Disclaimer: This article is for general conceptual guidance only and is neither an expert opinion, nor a substitute for an expert opinion in itself. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances.


 

Related Services

Corporate Registrations. We could assist you in the complete registration of your ROHQ or other legal business entity – ordinary corporation, license to do business for foreign corporations, foundations, non-stock and non-profit corporations. We already have established and registered a number of corporationslocal and foreign with the Securities and Exchange Commission and other government agencies.

Tax Management and Compliance Consultancies. With our tax services, we can assist you ensure tax compliance and in the management of such continuing compliance. Proper compliance would bring about tax savings form avoiding being penalized to tax minimization strategies. Likewise, we could assist you in securing a BIR ruling confirming the applicable tax exemptions.

Resident Agent Retainership. We can act as a Resident Agent who would act accordingly in accordance with the regulations.

 (Post viewed 3012 times)

13
June

5 Advantages of Corporation over Sole Proprietorship

In business, the use of a proper business entity or structure could bring about more business success, and the wrong choice could prove to be a failure. In most of our seminars on basic business accounting and tax compliance or basic bookkeeping for entrepreneurs, the following question is almost always raised:

“Which is better, a SOLE PROPRIETORSHIP or a CORPORATION?”

There are a number of ways where we could evaluate the two and no fast rule could answer the question because advantage in one aspect could be coupled with a disadvantage in other aspects so the choice would depend on which aspect gives more weight. Nevertheless, we feel that using a corporate set-up could best be beneficial in the following ways:

1. Limited liability in a corporation. In an instance where corporate assets fell short to pay its obligations and eventually shuts down, stockholders cannot be made liable to the extent of their personal assets. In a corporation, stockholders are only liable to the extent of their investments to the corporation, no more, no less. In a sole proprietorship, the legal entity of the business and that of the owner is the same, though, they are treated separate for accounting and tax compliance. In case the business incurs liability and could not pay, the separate personal assets of the owner could be held to pay for such liabilities.

To illustrate, let us take for example a trucking service business who was contracted to transport an expensive chemical from Metro Manila to Baguio for a fee. Along the way, the truck met an accident and the driver was at fault. A case was filed in court by the owner of the cargo and  the trucker was made to pay by the court a material amount.

On the above example, if the trucker is a corporation, then, the cargo owner can only resort to corporate assets and if the same is insufficient, the stockholders of the trucker company could not be held liable. However, if the trucker is a sole proprietorship, then, the owner will feel so sorry because his personal properties may have to be used to pay the same. Exception to this limited liability is the concept of piercing the veil of corporate entity where the legal entity of a corporation is disregarded if it is used to justify a wrong, protect a fraud, and such other ill instances. This however, would require a court intervention and is not that easy to apply.

2. Credibility of a large scale business. In the Philippines, common observation is that sole proprietorship is for small scale, while a corporation is for a large scale business operations. With much respect, we beg to disagree to this notion. We believe that being big is not really becoming big, but sometimes, a simple though of one being big would suffice. As a matter of fact, you can register a basic domestic corporation with PhP5,000.00 paid-up capitalization. Here is how we came about with this.

When we started this SME education advocacy on basic business accounting and BIR compliance in mid-2010, we initially used a sole proprietorship business for our personal convenience – evaluating the market, marketing strategies, facilities, and funding. That time, online marketing is up but there had been instances of fraudulent online sales – fictitious items and services sold but after initial payment, the seller is nowhere to be found. We require a reservation fee for the seminar workshop so some prospective participants doubted on our services as one same online fraud. I remember one participant who scouted at our office venue the day before and seeing no marks on the building about the event and the entity, it cancelled the reservation. Some only ended up with inquiries and never showed up on the day of the event.

The above instances gave us the though a using a corporate entity because in a corporate entity, we believed that we could lend credibility from the structure. With the corporation, the intended participants would have the impression of a large scale so they cast away their doubts. True enough, more participants are now coming in to participate. At present, we have participants coming in not only from Metro Manila, but from other parts of the country – or should I say, from all over the country. We have some participants from Ilo-ilo, Batangas, Laguna, Cavite, Pangasinan, Subic, Ilocos Sur, Baguio, and counting as we go along. We also had a pending invitation from a School in Southern Leyte for a one-day seminar program.

3. Public view of more heads running the business.This goes with the saying, “two heads are better than one”. In a sole proprietorship, the owner might have some employees but it could not do away with the impression that its only one running the same. In a corporation, public is aware of the number of persons in it – the Corporation Code requires at least five (5) to fifteen (15) incorporators to form a corporation.

This could also be used in pricing. Let us say the quote has been made under a business proposal. If the proposed client or customer would ask for a reconsideration, the sole proprietor will tend to be caught up to answer immediately. On the other hand, the corporate owner representing the corporation could simply say that he will have first to consult the Board of Directors for the unusual price consideration and could not decide outright. As such, he could not be left alone in a corner avoiding to compromise the business relationship in giving a “no” answer, if warranted.

4. Better tax management perspective. This one is also a great one. At a glace over the Tax Code, a sole proprietorship is tax at a progressive rates of 5-32%, while a corporation is taxed at 30% on its taxable net income, so it appears that the corporation enjoys 2% lower income tax rate than a sole proprietor. There could be more business expenses in a corporation that could not be made in a sole proprietorship, e.g. director’s fees, business meeting expenses, etc. All income of a sole proprietorship is taxed immediately under its owners account, while in corporation, net income after tax is taxed only upon actual distribution of cash or property dividends. In computing 40% optional standard deductions, corporation considers cost of sales while that of sole proprietorship is based on gross sales or net receipts.

5. More long-term structure. Natural persons could not live longer than corporations. Look around and observe big corporations and you will see some hundreds or thousand years old corporations. In a sole proprietorship, the death of the owner carries the death of its legal entity. In a corporation, the death of the founder simply leaves the legacy and a concrete evidence of how he lived and managed his business in a corporate set-up. In other words, if you want to be remembered in generations, you can put up a corporation with your name, manage it the best of what you can until its peak of success and maintain the same so when you die, your name will live indefinitely throughout the life of your corporation – decades or centuries and centuries.

As they say, men who want to be immortal may plant a tree, or raise sons that they will continue the virtue and the attribution to the name. Now, we propose an addition – register a corporation and be successful in it.

Summary

There could be more reasons of using a corporation over a sole proprietorship and there could be more stories about it. What matters is how you see it best and how you manage your business. After all, success is not purely dependent upon the structure, but a matter of how it operates.

Those who are interested in studying business issues like this should consider the University of St. Mary online MBA Program in order to advance their career.


Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. You can send your comments and feedback at info@taxacctgcenter.org.


Related Services.

Registration of Corporation. With our years of practice, we have already registered various corporations with the Securities and exchange Commission and other government agencies. We are confident that we could help you determine the appropriate corporate set-up for you, register the same and have it readied for your operations.

For foreign investors, there could be a number of options on what entity to use for Philippine operations. We could assist you determine which is most appropriate for your tax-efficient Philippine operations and register the same with various government agencies so you could operate based on your timeline.

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