ROHQ vs RHQ: When one letter creates a substantial distinction

In my July 31 column, I discussed whether the services rendered by a Regional Operating Headquarters (ROHQ) to its parent company may be subjected to value-added tax (VAT).

While it may be a little late in the day to discuss the basic concepts behind this specie called ROHQ, I would still like to take this opportunity to discuss the benefits and limitations of an ROHQ and differentiate it with a similarly sounding entity, the Regional or Area Headquarters (RHQ).

Republic Act 8756, entitled ‘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 Provision of Executive Order 226, Otherwise Known as the Omnibus Investments Code of 1987’, which was enacted on November 23, 1999, defined an ROHQ as 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. It is quite different from an RHQ, which is 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.

An ROHQ may engage in any of the following qualifying services: (a) general administration and planning; (b) business planning and coordination; (c) sourcing/procurement of raw materials and components; (d) corporate finance advisory services; (e) marketing control and sales promotion; (f) training and personnel management; (g) logistics services; (h) research and development services and product development; (i) technical support and maintenance; (j) data processing and communication; and (k) business development.  ROHQs are prohibited from offering qualifying services to entities other than their affiliates, branches or subsidiaries, as declared in their registration with the Securities and Exchange Commission nor shall they be allowed to directly and indirectly solicit or market goods and services whether on behalf of their mother company, branches, affiliates, subsidiaries or any other company.

Meanwhile, the activities of the RHQ shall be limited to acting as a supervisory, communications and coordinating center for its subsidiaries, affiliates and branches in the region.  It shall not derive any income from sources within the Philippines and shall not participate in any manner in the management of any subsidiary or branch office it might have in the Philippines nor shall it solicit or market goods and services whether on behalf of its mother company or its branches, affiliates, subsidiaries or any other company.

Due to the substantial distinction between an ROHQ and an RHQ, there are also differences in the incentives granted to them.

RHQs shall not be subject to income tax, while ROHQs shall be subject to a tax rate of 10 percent of their taxable income as provided for under the National Internal Revenue Code (NIRC), as amended by Republic Act 8424, provided that any income derived from Philippine sources by the ROHQ when remitted to the parent company shall be subject to the tax on branch profit remittance as provided for in Section 28(a)(5) of the NIRC.

RHQs shall, likewise, be exempted from VAT and the sale or lease of goods and property and the rendition of services to RHQs shall be subject to zero-percent VAT rate. ROHQs, on the other hand, shall be subject to the 10-percent VAT.

Meanwhile, the following incentives are granted to the foreign personnel of both ROHQ and RHQ: (1) multiple entry visa for their foreign personnel, their respective spouses and unmarried children under 21 years of age, if accompanying them or if following to join them after their admission into the Philippines as non-immigrant; (2) exemption from the payment of all fees due under the immigration and alien registration laws, securing alien certificates of registration and obtaining emigration clearance certificates and all types of clearances required by any government department or agency; (3) withholding tax of 15 percent on compensation income; (4) tax and duty-free importation of personal and household effects of their respective alien executives; and (5) travel tax exemption. Moreover, both RHQs and ROHQs shall be exempt from all kinds of local taxes, fees or charges imposed by a local government unit except real-property tax on land improvements and equipment.  Furthermore, both RHQs and ROHQs shall enjoy tax and duty-free importation of equipment and materials for training and conferences, which are needed and used solely for their functions as RHQs or ROHQs and which are not locally available subject to the prior approval of the Board of Investments.

I hope I was able to make it clear how the “O” made a difference between the two entities.  ’Till my
next column.

 

For comments, you may e-mail me at [email protected].

 

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