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Restricting the 15% Preferential Tax Rate for ROHQ Employees

While an ordinary Filipino employees withholding tax rate can go as high as 32 percent,
some employees of the Regional Operating Headquarters (ROHQ) are entitled to a 15
percent preferential tax rate under the Tax Code.
In several rulings, the Bureau of Internal Revenue (BIR) has confirmed that to qualify for
the 15 percent preferential tax rate, an ROHQ employee should hold a managerial
and/or a technical position. In Revenue Memorandum Circular (RMC) No. 41-2009, the
BIR not only defined a managerial and a technical position, but also clarified whether or
not an employee should be holding a managerial and technical position or whether it is
enough that an employee is holding a position that is either managerial or technical to
qualify for the 15 percent preferential tax rate. The BIR made these clarifications by
revoking a ruling it issued in 2004 (BIR Ruling DA -61-04, Cypress Semiconductor
Philippine Headquarters, Ltd.) where employees who hold positions as tax or a data
analysts were declared as not qualified to avail of the 15 percent preferential tax rate.
In the said RMC, the BIR defines a managerial employee by citing Philippines Alliance
Corporation vs. Laguesma, 226 SCRA 730, where the Supreme Court held that a
managerial employee is one who is vested with powers or prerogatives to lay down and
execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge,
assign or discipline employees. The test of managerial status depends on whether a
person possesses authority to act in the interest of his employer and whether such
authority is not merely routinary or clerical in nature, but requires the use of independent
management. Where such recommendatory powers are subject to evaluation, review
and final action by the department heads and other higher executives of the company,
the person having such recommendatory powers is not a managerial employee. The
fact that his work description is either manager or supervisor is of no moment
considering that it is the nature of his functions and not the said nomenclature of title
which determines his status.

On the other hand, a technical position is limited to positions which are highly technical
in nature or where there are no Filipinos who are competent, able and willing to perform
the services for which the aliens are desired. By adding the descriptive word highly, the
BIR has set another standard which unfortunately they failed to squarely define in the
RMC. Utilizing the intricacies of the features of Microsoft Excel may be highly technical
for an ordinary person but not to a certified public accountant. In other words, what is
highly technical is very subjective such that the parameters thereof should be clearly
established. Since the BIR revoked its ruling on Cypress, employees of an ROHQ who
do the work of a tax and data analyst, by definition, are not highly technical employees
who can enjoy the preferential tax rate of 15 percent. Consequently, similar employees
of ROHQs who do the same work and who currently enjoy the preferential rate should
expect to receive 17 percent less on their net pay.
Another issue that is addressed by the RMC is whether or not an employee should be
holding a managerial and highly technical position or whether it is enough that an
employee is holding a position that is either managerial or highly technical, to qualify for
the 15 percent preferential tax rate. The said RMC clarified that an employee should be
both holding a position that is managerial and technical to enjoy the preferential rate.
Thus, an employee who is holding a technical position but is not performing managerial
functions is not qualified to avail of the preferential tax rate. This twin requirement has
far reaching implications since this would affect salaries of employees who are currently
enjoying the preferential rate. ROHQs should be wary of possible tax assessments by
the BIR if they will continue to give the preferential rates to their employees who are only
holding either managerial or technical positions.
An RMC is meant to clarify laws and regulations for better enforcement and tax
collection. Unfortunately, RMC 41-2009 only clarified the obvious, i.e. the tests of what a
managerial employee is gave birth to the term highly technical employees in the
process. It is a new species that would invite subjective interpretations.
More importantly, many employees of an ROHQ are at risk to be burdened by a
maximum deduction of 32 percent from their net pay. The impending additional tax
deductions of these people whose earnings are hard earned should be avoided. The
BIR should find other sources of revenue that will not directly share in the pie of a
common Filipino worker.