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Dec-08-2009 The advantages of setting up regional headquarters in the Philippines

Many multinational companies, including offshore companies, choose to set up either a Regional or Area Headquarters (“RHQ”) or a Regional Operating Headquarters (“ROHQ”) in the Philippines in order to take advantage of certain tax exemptions and incentives.

An RHQ is defined by law¹ as an administrative branch of a multinational company engaged in international trade that principally serves as a supervision, communications and co-ordination centre for its subsidiaries, branches or affiliates in the Asia-Pacific region and other foreign markets. It must not earn or derive income in the Philippines. An RHQ is also not allowed to participate in any way in the management of any subsidiary or branch office it might have in the Philippines, nor may it solicit or market goods and services, whether on behalf of its mother company or on behalf of its branches, affiliates, subsidiaries or any other company.

An ROHQ is allowed to derive income from the Philippines by performing qualifying services to its affiliates, subsidiaries or branches in the Philippines, within the Asia-Pacific region and in other foreign markets. ROHQs may engage in the following activities:

General administration and planning;
Business planning and co-ordination;
Sourcing or procurement of raw materials and components;
Corporate finance advisory services;
Marketing control and sales promotion;
Training and personnel management;
Logistics services;
Research and development services and product development;
Technical support and maintenance; and
Data processing and communication

The initial funding requirement to set up an RHQ is US$50,000, while for an ROHQ it is US$200,000. The certificate of inward remittance of such initial funding issued by a local bank must be submitted to the Securities and Exchange Commission within thirty (30) days from receipt of the SEC certificate of registration.

Here’s a summary of the basic advantages and incentives for an RHQ and an ROHQ:

ADVANTAGES AND INCENTIVES
Regional or Area Headquarters (“RHQ”)	Regional Operating Headquarters (“ROHQ”)
An RHQ’s income is exempt from corporate income tax and from branch profits remittance tax An RHQ’s income is exempt from VAT (value-added tax) The sale or lease of goods and property, including rendition of services to an RHQ, shall be zero-rated for VAT Exempt from payment of all kinds of local government taxes, fees or charges, except real property tax on land improvement and equipment Tax- and duty-free importation of training materials and equipment not locally available. Multiple-entry special visas for an expatriate and his/her spouse and unmarried children below 21 years of age 15% withholding tax on compensation income for expatriates and qualified Filipinos occupying managerial and highly technical positions.² Travel Tax exemption during the period of an expatriate’s assignment in the country Tax- and duty-free importation of personal and household effects of an expatriate	An ROHQ’s taxable income will be subject to 10% preferential tax rate and 10% percent VAT (value-added tax) An ROHQ, unlike an RHQ, will however be subject to branch profits remittance tax Exempt from payment of all kinds of local government taxes, fees or charges, except real property tax on land improvements and equipment Tax- and duty-free importation of training materials and equipment not locally available. Multiple-entry special visas for an expatriate and his/her spouse and unmarried children below 21 years of age 15% withholding tax on compensation income for expatriates and qualified Filipinos occupying managerial and highly technical positions.² Travel Tax exemption during the period of an expatriate’s assignment in the country Tax- and duty-free importation of personal and household effects of an expatriate

Disclaimer: The information and opinion expressed herein were produced by AFP Group as of the date of writing and are subject to change without prior notice. The information provided is not intended to replace or serve as substitute for any legal, accounting, tax or consulting advice, and should be used only in conjunction with appropriate professional advice obtained from a suitably qualified professional who understands the particular factual situation and issues.

[1] Republic Act No. 8756 “An Act providing for the terms, conditions and licensing requirements of Regional or Area Headquarters, Regional Operating Headquarters, and Regional Warehouses of Multinational Companies, amending for the purpose certain provisions of Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987 (approved on November 1999)”

[2] BIR Revenue Memorandum Circular No. 41-2009 dated 23 July 2009 clarified the meaning of “Managerial and Technical Positions” under Section 25(C) of the Tax Code of 1997, as amended.

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