ROHQ: The Birth and Eventual Demise of a Hype
UPDATE 2018/01/31: The ROHQ's 15% preferential tax rate is now officially dead! The provision has been vetoed out by the President in the final TRAIN Law (BIR Tax Advisory).
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A few years ago, while I was still with my first company, our company HR then and the admin in general had this dilemma (as most HRs in the IT industry) - the worsening employee retention rate. In other words, rampant resignations. One of the major causes apparently (as usual) is compensation and - by association - benefits. The usual dilemma is in addressing the compensation issues while not compromising the company's profitability.
I could imagine that the admin must have studied the existing laws to exploit the taxation that has been a major setback in enjoying our respective monthly salaries. I mean who wanted a 32% void in our respective payslips, right? In perspective, that's a little more than a quarter of work without pay yearly!
And so the idea of an ROHQ was born (That was around 2006-2007 I think). And right there, starts the supposedly brighter future for the hardworking programmers in a multinational company of this country.
What's an ROHQ?
ROHQ stands for Regional Operating Headquarters. In it's simplest sense, it's a business entity in the country who caters to no other than it's own affiliate, subsidiary or branch in the Asia Pacific or in other foreign region. What you've probably knew of an ROHQ is the famous 15% preferential tax rate! To us employees, that's probably the most important advantage to be employed in an ROHQ company. We'd go back to that later. For now, let's dig a bit of our history 2 decades ago.
Executive Order 226
In order to promote a conducive environment for foreign investments, the then President Corazon Aquino signed Executive Order 226 of July 16, 1987. It was better known as the Omnibus Investments Code of 1987. Basically, the EO provides a comprehensive set of incentives for the local and foreign enterprises engaged in activities considered by the Philippine government as crucial to the national development. What we're concerned right now is what is stated in the Book III of the EO titled "Incentives to Multinational Companies Establishes Regional or Area Headquarters In The Philippines".
Additionally, the EO set specific parameters on the limitations of a Regional headquarters.Any foreign business entity formed, organized and existing under any laws other than those of the Philippines whose purpose, as expressed in its organizational documents or by resolution of its Board of Directors or its equivalent, is to supervise, superintend, inspect or coordinate, its own affiliates, subsidiaries, or branches in the Asia-Pacific Region may establish a regional or area headquarters in the Philippines.. (excerpt from Art. 58)
1. The activities of the regional headquarters shall be limited to acting as a supervisory, communications and coordinating center for its subsidiaries, affiliates and branches in the region;The 15% incentive is specified in Article 60.
2. The headquarters will not derive any income from sources within the Philippines and will not participate in any manner in the management of any subsidiary or branch office it might have in the Philippines; (excerpt from Art. 58)
Aliens employed by regional or area headquarters of multinational corporations shall be subject for each taxable year upon their gross income received from the regional or area headquarters established in the Philippines by multinational companies as salaries, wages, annuities, compensations, remunerations, and emoluments to a tax equal to fifteen percentum of such gross income. (Art. 60)Now, if you noticed the "Alien" part in the statement, I must congratulate you. That means, you're trying to understand the goddamn thing. And yes, you're reading it right. Martians or Uranians get the incentives but not Filipinos. Now that's a huge bummer. No mention of the 15% incentive in other part of the documents anymore,so we're pretty much done here.
Republic Act 8756
The ROHQ is actually born out of an RA enacted on November of 1999. It mentions the term Regional Operating Headquarters which is essentially absent in the referred EO. Both the original entity in the EO and this new term is defined in article 2.
So basically, the original EO is amended to include the new entity. By adding the new entity, it now included the technical people as we knew today....(2) Regional or Area Headquarters (RHQ) shall mean an office whose purpose is to act as an administrative branch of a multinational company engaged in international trade which principally serves as a supervision, communications and coordination center for its subsidiaries, branches or affiliates in the Asia-Pacific Region and other foreign markets and which does not earn or derive income in the Philippines; and(3) Regional Operating Headquarters (ROHQ) shall mean a foreign business entity which is allowed to derive income in the Philippines by performing qualifying services to its affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific Region and in other foreign markets.
And most importantly, the mention of Filipinos in the 15% tax clause....The regional operating headquarters may engage in any of the following qualifying services:
Art. 61. Withholding Tax of 15% on Compensation Income. - Aliens employed by the regional or area headquarters and regional operating headquarters of multinational companies shall be subject for each taxable year upon their gross income received as salaries, wages, annuities, compensations, remuneration and emoluments to a tax equal to fifteen per centum (15%) of such gross income. The same tax treatment is applicable to Filipinos employed and occupying the same positions as those aliens employed by multinational companies: Provided, That said Filipinos shall have the option to be taxed at either 15% of gross income or at the regular tax rate on their taxable income in accordance with the National Internal Revenue Code, as amended by Republic Act No. 8424
From ABC Company to ABC ROHQ
So there. We have an existing law that recognizes a business entity of a multinational company and in such accorded a few incentives that, in a sense, genuinely promoted foreign investment and employee morale. The question now is to whether it is a compelling factor in minimizing resignations in my previous company?
Without a doubt it was. A 15% preferential tax became one of the major factor of candidate employees and similarly to those employees who were contemplating of going out. It didn't work for me (e.g. I left anyway in favor of a non-ROHQ company) but I knew of a lot of people who scrapped the whole resignation thing. And it's safe to say that it was a major success for the admin in boosting employee morale. Hell, that's 15% man! You don't just easily convince companies to go through a lengthy and expensive procedure just to be listed as an ROHQ. When I mean lengthy, I mean at least a year. And when I mean expensive, I'm talking millions. Or so I heard.
Boom.
The news spreads quickly like the quietest fart in an elevator, especially when you're in the IT industry. Everyone hears of a company who had run the extra mile to boost employee morale. The company offering a 15% tax to its employee became a market heavyweight. I mean who wouldn't think so, right? And so other companies are pulling their government documents of investment laws and started reading. Every. Goddamn. Word.
And right there they realized, yeah it was legal. It's there! It's in the goddamn republic act and wossname. And literally everyone wanted to get a piece of the proverbial pie. Well, who wouldn't? Don't mind the red tape, it's a goddamn 15%. Period.
The Big Bad Wolf
But the government isn't impressed. No. Not a bit. Mr. Big Ole Government hated the whole ruckus. To make the story short, the Bureau of Internal Revenue issued a Revenue Memorandum Circular (RMC) No. 41-2009 that in essence tried to set who exactly are entitled to the much coveted 15% preferential tax.
...In view thereof, only Filipinos employed and occupying managerial and highly technical positions as defined above similar to the positions of the aliens employed by regional or area headquarters and regional operating headquarters of multinational companies shall be entitled to the option to be taxed at either 15% of gross income or at the regular income tax rate on their taxable income in accordance with section 25(C) of the tax code of 1997...Notice the keywords "and" and "highly technical" in the underlined text above.The memorandum doesn't set a concrete definition of what's a highly technical position is other than continually reiterating the phrase "highly technical in nature". I mean, how vague can it get. This memo alone sets the standard more than a bit higher that the purpose of preserving employee compensation is as tangible as a dream.
The Silver Lining But...
Then the new administration came into the whole picture. With Finance Secretary Cesar Purisima and BIR Commissioner Kim Henares revising once again the implementing rules and regulations of this same law that brought the RHQ/ROHQ into our lives. The government must have realized how the previous memo sounded like an asshole posing as a bureaucrat. And that both managerial and technical are highly uncorrelated positions. Thus born another BIR ruling - the Revenue Regulations (RR) 11-2010.
...Section 2. Who are qualified - Filipinos employed by ROHQs or RHQs in a managerial or technical position shall have the option to be taxed at either fifteen percent (15%) of their gross income or at the regular income tax rate on taxable compensation income in accordance with Section 24 of the Tax Code...Notice the big change from "and" to "or". It now makes more sense.
But wait! There's more. The ruling also sets up the qualifying requirements on who gets the preferential tax and who doesn't by the 3 tests as defined in Section 3:
- Position and Function Test - The employee must occupy a managerial or technical position and must actually be exercising such position.
- Compensation Threshold Test (aka Go-Fuck-Yourself-Because-You-Aint-Getting-This Test) - The employee must have received or is due to receive, under a contract of employment, a gross annual taxable compensation of 975,000.00 (whether or not this is actually received).
- Exclusivity Test - The Filipino employee must be exclusively working for the RHQ or ROHQ as a regular employee.
In the end, meh...
If I can recall correctly, my old company has successfully transitioned into an ROHQ in April of 2007. There was much rejoice then since the effect of the new tax rate was retroactive starting from January of that year. This tax rate however had little effect on me personally because my tax exemption as head of the family was waived in return. Nevertheless, it was some sort of a reprieve from the highly technical (a.k.a demanding) nature of our jobs. I left the company in December of the same year in favor of a non-ROHQ company. Reason? I was just bored with what I was doing.
The IT community (or at least the circle I was in) was pretty much agitated by the new BIR rulings regarding the ROHQ thing. I felt sincerely sorry for those who were affected without prior adjustments to their compensations. At the same time I kind of in favor of the new government rulings. The BPO boom of this past decade brought up a huge number of technical and highly competent Filipino employees. The government wanted to promote investments by giving out incentives but they had to raise money in the most humane way possible. The ROHQ in the past somewhat brought up unjust tax practices. I'm not saying it still isn't. I'm just saying it raised its standards a little bit higher.
The RHQ/ROHQ is still around. The incentive is being limited to those employees who qualified for the threshold. It's one of those things that rewarded those who already have. But for me that's the beauty of the system. You look up and you see the benefits of being "up there". And so you work extra hard to "be there".
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Sources:
Executive Order 226
Republic Act 8756
BIR RMC 41-2009 (pdf)
BIR RR 11-2010 (pdf)
Well written and very informational. Keep writing! Thank you.
ReplyDeletewill it still be around in view of the new tax reform bill?
ReplyDelete