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:
- general administration and planning
- business planning and coordination
- sourcing and procurement of raw materials and components
- corporate finance advisory services
- marketing control and sales promotion
- training and personnel management
- logistic services
- research and development services and product development
- technical support and maintenance
- data processing and communication, and,
- 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):
- 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
- 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.
- Exclusivity test or that the employee must be exclusively an employee servicing a single ROHQ.
- 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:
- 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;
- Endorsement from the Board of Investments;
- 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
- 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;
- 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;
- 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
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 firstname.lastname@example.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.
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 corporations – local 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.
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