Threattrack TP Executive Summary FINAL (Repaired)

8/10/2019 Threattrack TP Executive Summary FINAL (Repaired)

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CTCS ThreatTrack Security Philippines, Inc. 2013 Transfer Pricing Analysis

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1. Executive Summary

a. Introduction

On January 23, 2013, the Philippine tax authority, the Bureau of Internal Revenue

passed Revenue Regulations No. 2-2013 requiring all businesses with related

party transactions, to follow the arms length principle in their financial and

commercial dealings.

RR 2-2013 applies to cross-border and domestic transactions between associated

enterprises. Section 5 requires transaction with a related party to be made under

comparable conditions and circumstances as a transaction with an independent

party. Market forces should be the sole driving forces that influence the pricing

of goods and services to reflect the true economic value of the contributions made

by each entity in the transactions.

In compliance to the above regulations, Threattrack Security Philippines, Inc.,a wholly owned subsidiary of Threattrack Security Inc. with address at No. 33

North Garden Avenue, Suite 1200 Clearwater, Florida 33755, a company that

offers advanced threat defense, antivirus, email and internet security, have

undergone a transfer pricing analysis to prove that their transactions are arms

length.

b. Summary

i. Summary of Selected Transfer Pricing Methods

The selected Transfer Pricing Methods used in the analysis are:

Comparable Uncontrolled Price Method

Resale Price Method

Cost Plus Method

Transactional Net Margin Method (TNMM)

Profit Split Method (PSM)

ii. Summary of Economic Analysis

Customer Support Services Provided by Threattrack

Security Philippines, Inc. to Threattrack Security Inc.

o Using the financial data of the two associated or

related companies and applying the Cost PlusMethod (CPM) provided the most reliable method

for examining the transactions.

Software Application Development

Software Maintenance


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c. Basis for Opinion

A transfer pricing study were made and contemporaneous documentation

gathered to avoid penalties provided under RR 2-2013. Section 50 of the National

Internal Revenue Code of 1997, as amended, provides that .- In the case of two

or more organizations, trades, or businesses (whether or not incorporated

and whether or not organized in the Philippines) owned or controlled

directly or indirectly by the same interests, the Commissioner is authorized

to distribute, apportion, or allocate gross income or deductions between or

among such organization, trade or business, if he determines that such

distribution, apportionment, or allocation is necessary in order to prevent

evasion of taxes or clearly to reflect the income of any such organizations,

trade or business. Thus, to avoid further adjustments that will result to

deficiency income taxes, this study will prove that the arms length principle has

been followed throughout the taxable year.

d. Report Contents

In addition to the Executive Summary, this transfer pricing study contains

Company Overview (Section 2), Explanations of Intercompany Transactions

(Section 3), Statistical Information about the Business Outsourcing Industry

(Section 4), Regulations in the Industry (Section 5), Characteristics or Nature of

the Services (Section 6), Functions, Assets and Risk Analysis (Section 7),

Selection of Transfer Pricing Method (Section 8), Economic Analysis (Section 9),

Selection of the Tested Party (Section 10), List of Comparables (Section 11),

Comparability Analysis (Section 12), Conclusions (Section 13) and Appendices(Section 14).

2. Company Overview

a. Company Background and Organization

Threattrack Security Philippines, Inc.(TSPI), a wholly owned subsidiary of

Threattrack Security Inc. , (Formerly GFI Software Philippines Inc., a wholly

owned subsidiary of GFI Software (Florida) Inc.). It is registered with the

Securities and Exchange Commission on September 1, 2008 to conduct thebusiness of Security Software Development, provide security solutions for

complex spyware, viruses and malware, and to make and carry out contact of

every kind and character that may be necessary or conducive to the

accomplishment of the purpose of the corporation.


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TSPI is a PEZA-registered Ecozone IT (Export) Enterprise with Registration

Certificate Number 10-37-IT dated July 9, 2010 as further amended on 25

September, 2013, to engage in : (1) Software Application Development and

Maintenance, and (2) Customer Technical Support.

Under the Registration Agreement with PEZA dated 07 July 2010 (software

application development and maintenance), TSPI shall not be entitled to Income

Tax Holiday (ITH) incentive, but shall be only entitled to the 5% Gross Income

Tax (5% GIT) incentive, in lieu thereof of all national and local taxes, as provided

in RA 7916, as amended, and to incentives under Article 77, Book VI of EO 226,

provided that it complies with the export sales requirement prescribed for

Ecozone IT Export Enterprises.

Supplemental Agreement with PEZA dated May 8, 2013 for Customer Technical

Support, incentives under Book VI of EO 226 include the following:

1.

Corporate income tax holiday (ITH) for four (4) years for original projecteffective on the committed date of start of commercial operations, or the

actual date of start of commercial operations, whichever is earlier; ITH

entitlement for the original project can also be extended for another three

(3) years provided specific criteria are met for each additional year and

prior PEZA approval is obtained; duly approved and registered

Expansion and New projects are entitled to a three-year, and four-year

ITH, respectively;

2. Tax and duty free importation of merchandise which include raw

materials, capital equipment, machineries and spare parts;

3.

Exemption from wharfage dues and export tax, impost or fees;4. VAT zero-rating of local purchases subject to compliance with BIR and

PEZA requirements; and

5. Exemption from payment of any and all local government imposts, fees,

licenses or taxes except real estate tax; however, machineries installed and

operated in the ecozone for manufacturing, processing or for industrial

purposes shall not be subject to payment of real estate taxes for the first

three (3) years of operation of such machineries; production equipment not

attached to real estate shall be exempt from real property taxes

After the lapse of ITH, the following incentives shall apply:

Exemption from National and local taxes, in lieu thereof payment of 5%

final tax on gross income provided in Section 24 of R.A. 7916 and Rule

XX of the Rules and Regulations to implement R.A. 7916, and


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Additional deduction for training expenses (1/2 of value) against the 5%

tax on gross income earned, but not to exceed 3%, subject to guidelines to

be formulated by PEZA in coordination with the Department of Labor and

Employment and the Department of Finance (Section 42 of R.A. 7916).

Pursuant to BIR Revenue Regulations No. 14-2002, income payments to

PEZA registered enterprise under the ITH and GIT incentives are exempt

from expanded withholding tax.

b.Threattrack Security, Inc.

ThreatTrack Security Philippines, Inc.Organizational Chart showing relationship of parent and subsidiaries

ThreatTrack Security specializes in helping organizations identify and stop Advanced PersistentThreats (APTs), targeted attacks and other sophisticated malware designed to evade the

traditional cyber defenses deployed by enterprises and government agencies around the world.With more than 300 employees worldwide and backed by Insight Venture Partners and BessemerVenture Partners, the company develops advanced cybersecurity solutions that Expose, Analyzeand Eliminate the latest malicious threats, including its ThreatSecure advanced threat detectionand remediation platform, ThreatAnalyzer malware behavioral analysis sandbox, ThreatIQ real-time threat intelligence service, and VIPRE business antivirus endpoint protection. Learn more atwww.ThreatTrackSecurity.com.

THREATTRACK SECURITY INC.(Parent Company)

Clear Water, Florida

THREATTRACK SECURITY PHILIPPINES,

INC.(Wholly-Owned Subsidiary)

Fort Bonifacio, Taguig


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EnCase, EnScript, FastBloc, EnCE, EnCEP, Guidance Software and Tableau are registeredtrademarks or trademarks owned by Guidance Software, Inc. in the United States and otherjurisdictions and may not be used without prior written permission. All other trademarks andcopyrights referenced in this press release are the property of their respective owners.

ThreatTrack Security specializes in helping organizations identify and eliminate AdvancedPersistent Threats (APTs), targeted attacks and other sophisticated malware that are designed to

evade the traditional cyber defenses deployed by enterprises and government agencies

worldwide. ThreatTrack Security develops advanced cybersecurity solutions that expose, analyze

and eliminate the latest malicious threats, including itsThreatSecure real-time advanced threat

detection and remediation solution,ThreatAnalyzer malware behavioral analysis sandbox,

ThreatIQ real-time threat intelligence service, andVIPRE business antivirus endpoint protection.

Its solutions are used to defend more than 10 million endpoints worldwide, and are a critical

component of the U.S. cybersecurity infrastructure. ThreatTrack Security customers include

government agencies, leading financial institutions, energy firms, technology companies, systemintegrators, retailers, communications firms and enterprises of all sizes, as well as consumers.

ThreatTrack was established in 1994 as Sunbelt Software Inc. to provide best-of-breed security

solutions to the rapidly growing Windows user base. For the next decade, the company created a

broad array of security solutions for consumers, businesses and large enterprises, including its

popular CounterSpy anti-spyware software, iHateSpam email security product and the

CWSandbox (now ThreatAnalyzer) automated malware analysis sandbox.

In 2008, the company launched its VIPRE antivirus product line. VIPRE combined anti-malware

and anti-spyware into a single, small-footprint antivirus solution designed to providecomprehensive malware protection to users without slowing down their PCs or networks.

Sunbelt Software was acquired by GFI Software Inc., in 2010, becoming the GFI Software

Security Business Unit. GFI Software is a leading provider of IT solutions for small and medium

businesses, and its Security Business Unit continued to develop and enhance VIPRE,

ThreatAnalyzer and ThreatIQ among other security solutions.

GFI Software announced plans to spin off its Security Business Unit in 2013, when ThreatTrack

began operations as an independent company.

In 2014, ThreatTrack Security launched its ground-breaking ThreatSecure real-time advanced

threat detection and remediation platform, changing how organizations defend themselves from

APTs.
http://www.threattracksecurity.com/threatsecure.aspxhttp://www.threattracksecurity.com/enterprise-security/sandbox-software.aspxhttp://www.threattracksecurity.com/enterprise-security/threat-intelligence.aspxhttp://www.threattracksecurity.com/business-antivirus/vipre-premium-virus-protection.aspxhttp://www.threattracksecurity.com/business-antivirus/vipre-premium-virus-protection.aspxhttp://www.threattracksecurity.com/enterprise-security/threat-intelligence.aspxhttp://www.threattracksecurity.com/enterprise-security/sandbox-software.aspxhttp://www.threattracksecurity.com/threatsecure.aspx


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ThreatTrack Security is based in Clearwater, Fla., with operations in Washington D.C., the

Philippines, Spain and Australia.

Threattrack Security Inc.Organizational milestone starting 1994 up to the Present


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3. Intercompany Transactions

a. Customer Technical Support Services

i. Overview

Customer support is a range of customer services to assist customers inmaking cost effective and correct use of a product. It includes assistance inplanning, installation, training, trouble shooting, maintenance, upgrading,and disposal of a product.

TSPI provides the following services to its customers:

a. Coordinate with various stakeholders in ensuring the timely deliveryof quality detections to target malware families

b. Provide detection status and productivity reports on a regular and on-demand basis

c.

Verify engine bugs and limitations, provide interim solutions ifapplicable, and escalate the issue to the Advanced Solutions Groupd. Handle escalations submitted by members of other AV Lab teamse. Verify engine bugs and limitations, provide interim solutions if

applicable, and escalate the issue to the Engine Teamf. Develop detection signatures to reduce definition sizeg. Verify engine bugs and limitations, provide interim solutions if

applicable, and escalate the issue to the Advanced Solutions Grouph. Provide engine feature requests to the Advanced Solutions Groupi. Develop tools and automation systems to generate required reports and

improve team capabilities

j.

Handle assigned vulnerability-related casesk.

Reverse engineer binary file to determine malicious intent and activityl. Develop detection and remediation signaturesm. Provide vulnerability-related information as requestedn. Research vulnerabilitieso. Provide training and coaching on vulnerability analysis, and detection

and remediation technologiesp. Prototype new detection and remediation technologies

Regarding technology products such as mobile phones, televisions,computers, software products or other electronic or mechanical goods, it is

termedtechnical support.

b. Software Application Development

i. Overview
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TSPIperforms a variety of development work that requires knowledge onthe best practices of software development in a agile/scrum realm. Thedevelopment of programs are based on the needs of the customers.

The tasks include the following:

a. Coding, testing and troubleshooting programs utilizing the appropriatehardware, database and programming technologies

b. Maintaining and modifying program codes, coordinated with ProductOwner

c. Make approved changes amending designs that includes program logicand coding changes

d. Testing and Develop program modificationse. Developing unit tests for every unit of codef. Helping out on developing test cases as requested by the QA team

member / QA Manager assigned to the team

g.

Conferring with Product Owner and Scrum Master as to gain a deeperunderstanding on the requirements being allocated by the Product Owneron each release / sprint

h. Writing and maintain documentationi. Documenting and raise programming problems and resolutions for

future referencesProblem Managementj. Providing on-the-job-training / on-boarding to new team membersk. Adhering to TTD practicesl. Maintaining confidentiality with regards to information of the project

and the companym.

Performing other related tasks as needed

c. Software maintenance

i. Overview

Software maintenanceinsoftware engineering is the modification of a softwareproduct after delivery to correct faults, to improve performance or other attributes.

TSPI performs the following:

a. Follow the test plan and test case to execute the testing in full testing cycle

and regression testing cycleb. Follow standard QA process to keep project defect recordsc. Execute manual and automated test scripts and own delivery of daily bug

reportingd. Follow standard QA process to generate testing report documentation during

testinge.

Report software problems and verify code fixes proactively report status toTest managers
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f. Design reasonable test plan and test case according to the projects SRS,schedule and resource

g. Coordinate testing activities of several test engineers or tester (including OJTsand Contractual)

h. Develop testing resource estimates and schedules for overall QA

i.

Provide technical QA leadership and vision ensuring the delivery of highquality applicationsj. Provide QA direction and guidance to the project management team in all

phases of the project to ensure a successful deliveryk. Perform QA validate/check planning and requirements level documentationl. Identify process deficiencies and effectively implement process improvementsm. Develop and execute SQA audits of projects, prepare baseline reports, help

management do analysis of their data for KPM targets, find root cause ofproblems or to improve the process flow

n. Develop and execute training for the organization on the quality processeso. Handle own QA Tasks in projects assigned to him/her

p.

Develop and generate samples or test data needed for testingq.

Develop and maintain automation tools to drive quality and efficiencyimprovements as needed

r. Participate in design and code inspections

The key software maintenance issues are both managerial and technical. Keymanagement issues are: alignment with customer priorities, staffing, whichorganization does maintenance, estimating costs. Key technical issues are: limitedunderstanding,impact analysis,testing, maintainability measurement.

Software maintenance is a very broad activity that includes error correction,enhancements of capabilities, deletion of obsolete capabilities, and optimization.Because change is inevitable, mechanisms must be developed for evaluation,controlling and making modifications.

So any work done to change the software after it is in operation is considered tobe maintenance work. The purpose is to preserve the value of software over thetime. The value can be enhanced by expanding the customer base, meetingadditional requirements, becoming easier to use, more efficient and employingnewer technology. Maintenance may span for 20 years, whereas developmentmay be 1-2 years.

4. Statistical Information About the Industry

a. Industry Definition and Statistics

i. Customer Support Services

From a sourcing perspective, the Philippines is one of the global titans.Ranked 2nd after India as a business process offhoring market bydestination, the Philippines has emerged as a power-player that hasaggressively taken advantage of the outsourcing trends over the past decade.
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In 2009, IT and BPO revenues totaled $7.2 billion and the Philippinesrepresented 21% of the total offshore BPO market.

Clearly, with a large pool of English-speaking talent and 92.6% literacyrate, the scale and skills required for both voice and non-voice BPO arepresent. Currently, the nation has over 600 IT & BPO companies present

with labor force totaling approximately 400,000. In regards to growth, onaverage the o_shore market in the Philippines has expanded 46% annuallysince 2004.4 Speci_cally, the country witnessed incredible growth from2007 to 2008 as the back office and KPO sector more than doubled from$400 million to $830 million.This expansion has not stopped. During thefinancial crisis alone, the Philippines bucked the negative global trend anddemonstrated a 19% growth rate in IT / BPO revenues.6 With this level ofoperational tempo and expansion, not only is talent available across thePhilippines, it is also now proven. Several examples of the types ofcompanies that conduct operations in the Philippines include globalenergy, financial services, retail, manufacturing, technology and media.

These companies operate voice and non-voice business processes in varioussegments including:

Finance & Accounting

Transaction Processing

Data Management

Transcription

Human Resources

Legal Services

IT AD&M

Medical

Logistics

Publishing

Market Research

Customer Management

Source: Business Processing Associati on of the Phi l ippines

b. Software Application Development


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Philippine IT-BPO annual revenues could more than double to US$25 billionequivalent to a 10

percent share of the global marketby 2016, according to an industry road map released by the

Business Processing Association of the Philippines (BPAP). However, the road maps authors

said the industry must accelerate its talent development initiatives and obtain stronger

government support to meet that goal. If it does, the IT-BPO industry could employ up to 1.3

million Filipinos and account for nine percent of GDP.

MARKET STRUCTURE


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The Philippines was a US colony from 1898 to 1946, which gives the country a heritageof being an English-speaking country. The privatization in the


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country has led to a wave of investments. ThePhilippines government has undertaken various initiatives and enhanced the investmentcompetitiveness and taxation conditions in country. There are number of preferentialregimes that have been introduced by the government such as tax and custom benefitsand the creation of a special economic zone, PEZA, which gives investment opportunities

to foreign investors. In addition, efforts to simplify regulations and reduce administrativebarriers offer fast development opportunities for foreign companies. The countrysaffinity with Western culture and developed telecommunications infrastructure makes it afavorable location for outsourcing.

The Outsourcing market in the Philippines can be divided into three segments based onthe type of service into Voice BPO, Non-voice BPO, and IT Outsourcing and ESO.

The Outsourcing Market in the Philippines 2014-2018, has been prepared based on an in-depth market analysis with inputs from industry experts. The Outsourcing market in thePhilippines landscape and its growth prospects in the coming years.

Key Vendors

Accenture plcConvergys Corp.JP Morgan Chase & Co.Teleperformance SA

Other Prominent Vendors

Aegis Ltd.Blast Asia Inc.

BPO International Inc.Computer Professional Inc.EACOMM Corp.IBM Corp.Point West Technologies Corp.ScopeWorks Asia Inc.SencorSitel Corp.
http://www.theoutsourceblog.com/wp-content/uploads/2014/07/Outsourcing9.jpeg


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SPI GlobalStream Global Services Inc.Sykes Asia Inc.TeleTech Holdings Inc.

Key Market Driver

Cost-EffectivenessFor a full, detailed list, view our report.

Key Market Challenge

Acquisition and Retention of Talent PoolFor a full, detailed list, view our report.

Key Market Trend

Growing Demand for Industry-specific Outsourcing ServicesFor a full, detailed list, view our report.

COMPETITION

The Big Three

Tholons sees that Southeast Asia, South America, and Eastern Europe to continue at theiraggressive pace in the near term and much of the traction reflected in this years rankings were

fruition from developmental actions taken in previous years. The combination of human capitaldevelopment programs, aggressive marketing and promotions activities, IT and related


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infrastructure development, as well as strong commitment of industry stakeholderswere someof the developmental levers taken by IT-BPO stakeholders in these regions.

The Philippines, Malaysia and Indonesia were amongst the most promising Southeast Asiandestinations in 2012. Among the three, the Philippines remains to have the most vibrant IT-BPOindustry, led by the emerged outsourcing destinations in the country, Manila NCR, whichclaimed the third top outsourcing destination spot in this years List, and deposing Indias Delhi

NCR (now 4th). Cebu City has likewise increased one notch In the List, from 9th place to 8thspot. In 2012, the Philippines IT-BPO industry was fueled by increased new investments fromlarge and mid-sized foreign providers, as well as greater expansions of established locators andcaptives across many of the countrys established delivery locations.

The IT-BPO Industry of the Philippines: Leaving No Room for Complacency

Todays current global market leader for voice BPO, the Philippines has proven that there's still

more to gain in the services globalization industry. Based on the events of 2012, the Philippinescontinued to garner interest from large, Western providers, not only as an offshore delivery

location, but likewise as a potential rich domestic market for IT Services.

Teleperformancedecided to establish yet another delivery center in Mandaluyong City(part of Manila NCR) over Canada

Convergys- opened its 18th call center in the Philippines in Mandaluyong City

UnitedHealthUS-based healthcare provider, established back-office operations for

healthcare in Taguig City (another city in Manila NCR), as a response to the market demandcreated by the US Patient Protection and Affordable Care Act.

EXL- another US service provider will open its third center in Cebu City, Philippines,

delivering healthcare and insurance-related services to US clients.

IBMwill continue to grow its BPO services in the country, focusing on higher valueanalytics

and high-value customer support services.

Wells Fargo & Co.plans on establishing a business support center in Taguig City toprovide customer service and back office services

Investment Center-UK, Sitel, and UK National Outsourcing Association marketed thePhilippines as a destination of choice among potential UK-based IT-BPO investors and clients.


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Why the Philippines is a Top Offshore BPM Location

.

The Philippine economy will continue to get a big boost from the business process outsourcing(BPO) industry this year as more companies in the world turn to Manila for their outsourcingneeds.

Manila is the world's 3rd most preferred BPO destination, improving by a notch in investmentadvisory firm Tholons' 2013 ranking of 100 leading BPO cities across the globe. The Philippine

capital overtakes Delhi, India, which now occupies the 4th spot.

Six other Philippine cities are in the list. Cebu City rises to 8th from 9th, pushing Dublin,Ireland down in the list. Sta. Rosa in Laguna climbs two spots to No. 84, while Iloilo is steadyat No. 93. Baguio City is new in the list, ranking 99th, while Bacolod City re-enters at No. 94.

The Philippines, according to Tholons, enjoys a more vibrant IT-BPO industry than eitherIndonesia or Malaysia. In 2012, these 3 countries were considered the most promising SoutheastAsian destinations because of their "maturing outsourcing brands, improving macroeconomicenvironment, and expanding domestic markets."

"The Philippines IT-BPO industry [has been] fueled by increased new investments from largeand mid-sized foreign providers, as well as greater expansions of established locators andcaptives across many of the countrys established delivery locations," Tholons says.

Benedict Hernandez, President and CEO of the Business Processing Association of thePhilippines, notes the Tholons' report "reaffirms the Philippines' position as a destination ofchoice for outsourcing services."


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"In 2012, we saw impressive growth across all sectors of the Philippine IT-BPO and GICindustry. The year 2013 promises to be even greater as we expect revenues to increase to US$16billion to provide employment to 926,000 Filipinos."

KPO from the Philippines

Proprietary & Confidential. Copyright 2010 BPAP, Everest Global, andOutsource2Philippines.

c. Software Maintenance

Software Maintenance Definition

Software standards document defines software maintenance as "the modification of asoftware product after delivery to correct faults, to improve performance or otherattributes, or to adapt the product to a modified environment." Software maintenance isthe concluding part of the software development process or "life cycle."(http://www.ehow.com/about_6643440_software-maintenance-definition.html)

TSPI renders software maintenance to its customers as an after-sales services.
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5. Regulations in the Industry

TSPI as a service industry provider has to comply with the regulations of the following

regulatory agencies of the government:

a. PHILIPPINE ECONOMIC ZONE AUTHORITY (PEZA) is a governmentagency in thePhilippines under theDepartment of Trade and Industrycreatedto help promote investments in the export-oriented manufacturing industry intothe country by assisting investors in registering and facilitating their businessoperations and providing tax incentives.

The PEZA is governed by the R.A 7916 but some of its provisions wereamended by the R.A 8748.

Fiscal Incentives to PEZA-Registered Economic Zone Enterprises

Information Technology Enterprise:

Income Tax Holiday (ITH)100% exemption from corporate income tax:o 4 years ITH for Non-pioneer projecto 6 years ITH for Pioneer project

ITH Extension year may be granted if Project complies with thefollowing criteria (one criterion is equivalent to one ITH extensionyear,), provided that the total ITH entitlement period shall notexceed eight (8) years:

> The average net foreign exchange earnings of the project for thefirst three (3) years of operations is at least US$500,000.00 and,

> The capital equipment to labor ratio of the project does notexceed US$10,000.00 to 1 for the year immediately preceding theITH extension year being applied for.

o 3 years ITH for Expansion project (ITH applies to incrementalsales)

Upon expiry of the Income Tax Holiday5% Special Tax on GrossIncome and excemption from all national and local taxes. (Gross

Income refers to gross sales or gross revenues derived from theregistered activity , net of sales discounts, sales returns and allowancesand minus cost of sales or direct costs but before any deduction is madefor administrative expenses or incidental losses during a given taxableperiod)

Tax and duty free importation of equipment and parts.
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Exemption from wharfage dues on import shipments of equipment. VAT zero-rating of local purchases of goods and services, including land-

based telecommunications, electrical power, water bills, and lease on thebuilding, subject to compliance with Bureau of Internal Revenues andPEZA requirements

Exemption from payment of any and all local government imposts, fees,licenses or taxes. However, while under Income Tax Holiday, noexemption from real estate tax, but machineries installed and operated inthe economic zone for manufacturing, processing or for industrialpurposes shall not be subject to payment of real estate taxes for the firstthree (3) years of operation of such machineries. Production equipmentnot attached to the real estate shall be exempt from real property taxes.

Exemption from expanded withholding tax.

Non-Fiscal Incentives to PEZA-Registered Economic Zone Enterprises

Simplified ImportExport Procedures (Electronic Import Permit Systemand Automated Export Documentation System).

Non-resident Foreign Nationals may be employed by PEZA-registeredEconomic Zone Enterprises in supervisory, technical or advisorypositions.

Special Non-Immigrant Visa with Multiple Entry Privileges for thefollowing non-resident Foreign Nationals in a PEZA-registered EconomicZone Enterprise : Investor/s, officers, and employees in supervisory,technical or advisory position, and their spouses and unmarried children

under twenty-one years of age. PEZA extends Visa FacilitationAssistanceto foreign nationals their spouses and dependents.

b. BASIC PHILIPPINE LABOR LAWS AND REGULATIONS

Employers, including small businesses, may implement policies andimpose terms and conditions of employment as they deem fit given their operatingand profitability requirements. These policies and employment terms andconditions however must be consistent with mandated labor policies set forth in

the Labor Code of the Philippines or P.D 442.

Under the Labor Code, employees are entitled to compensation or wages,overtime pay, holiday and premium pay, service charges and tips in servicebusinesses, SSS, service incentive leaves, and retirement pay.

MINIMUM WAGE


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Coverage

All covered employees are entitled to receive minimum wages regardless of

the following:

a.

their positionsb. designations

c. employment status; and

d. the method by which their wages are paid

The Minimum Wage Structure

The new minimum wage structure, incorporating the P10 increase as mandated

byWage Order No. NCR-18 is as follows:

DAILY MINIMUM WAGE RATESNational Capital Region (NCR)

Per Wage Order No. NCR-18

(Effective: 4 October 2013)

Upon Effectivity:

Sector/Industry Basic Wage Basic WageIncrease

New BasicWage

COLA NewWage Ra

Non-Agriculture P 426.00 P10.00 P436.00 P30.00 P 466.00

Agriculture (Plantation and NonPlantation)

P 389.00 P10.00 P399.00 P30.00 P 429.00

Private Hospitals with bedcapacity of 100 or less

P 389.00 P10.00 P399.00 P30.00 P 429.00

Retail/Service Establishmentsemploying 15 workers or less P 389.00 P10.00 P399.00 P30.00 P 429.00

Manufacturing Establishmentsregularly employing less than 10worker

P 389.00 P10.00 P399.00 P30.00 P 429.00

Effective 01 January 2014:

Sector/Industry New BasicWage

COLAIntegrationEffective01 January2014

Basic WageAfterIntegration

COLA NewMinimumWage RaEffective01 Janua

2014Non-Agriculture P 436.00 P15.00 P 451.00 P15.00 P 466.00

Agriculture (Plantation and NonPlantation)

P 399.00 P15.00 P 414.00 P15.00 P 429.00

Private Hospitals with bedcapacity of 100 or less

P 399.00 P15.00 P 414.00 P15.00 P 429.00

Retail/Service Establishmentsemploying 15 workers or less

P 399.00 P15.00 P 414.00 P15.00 P 429.00
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Manufacturing Establishmentsregularly employing less than 10workers

P 399.00 P15.00 P 414.00 P15.00 P 429.00

National Capital Region (NRC) covers the Cities of Caloocan, Las Pias, Makati,

Malabon, Mandaluyong, Manila, Marikina, Muntinlupa, Paraaque, Pasay, Pasig,

Quezon, San Juan, Taguig, and Valenzuela and Municipalities of Navotas and

Pateros.

Grants the following to all minimum wage workers in the private sector in the

region:

Upon effectivity: P10.00 per day basic wage increase Effective January 2014: Integration of P15.00 COLA from the P30.00 COLA

under W.O. No. NCR-17

Wage Order was issued September 6, 2013, published at Philippine Star on

September 19, 2013 and is effective October 4, 2013.

Coverage Wage rates per day prescribed in this wage order shall apply to all minimum

wage earners in the private sector in the Region regardless of their position,designation or status of employment and irrespective of the method by whichthey are paid.

The wage order does not cover household or domestic helpers; persons in theirpersonal service of another, including family drivers, and workers of duly

registered Barangay Micro Business Enterprises (BMBEs) with Certificate ofAuthority pursuant to Republic Act 9178.

.TSPI complies with the mandatory regulations of giving wages to its

employees by paying more than the required salary rates.

THREATTRACK SECURITY PHILS. INC

Employee Daily/Hourly Rates

No. DEPARTMENT Daily Hourly

1 TSR 1,436.30 179.54

2 TSR 3,192.13 399.02


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3 TSR 1,639.36 204.92

4 AVLab 1,183.66 147.96

5 AVLab 1,868.94 233.62

6 TSR 1,253.75 156.72

7 TSR 2,231.32 278.91

8 AVLab 1,061.38 132.67

9 Dev/Test 2,999.54 374.94

10 IT 1,636.95 204.62

11 TSR 1,841.80 230.23

12 TSR 3,178.55 397.32

13 Dev/Test 8,782.75 1,097.84

14 AVLab 1,038.30 129.79

15 AVLab 1,845.87 230.73

16 TSR 2,452.57 306.57

17 AVLab 1,933.61 241.70

18 AVLab 1,079.83 134.98

19 Dev/Test 4,670.92 583.87

20 AVLab 2,436.55 304.57

21 TSR 8,392.96 1,049.12

22 Dev/Test 4,118.60 514.82

23 TSR 1,123.50 140.44

24 TSR 1,061.38 132.67

25 Dev/Test 2,601.52 325.19

26 HR 2,780.83 347.60

27 AVLab 1,095.99 137.00

28 AVLab 5,159.21 644.90

29 IT 1,658.35 207.29

30 TSR 1,147.01 143.38

31 HR 1,203.90 150.49

32 TSR 1,139.04 142.38

33 Dev/Test 3,766.98 470.87

34 Dev/Test 10,371.63 1,296.45


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35 TSR 1,398.68 174.83

36 AVLab 4,199.35 524.92

37 AVLab 1,359.02 169.88

38 TSR 1,315.84 164.48

39 Dev/Test 3,432.97 429.12

40 TSR 1,732.21 216.53

41 AVLab 1,082.14 135.27

42 AVLab 5,757.87 719.73

43 IT 1,035.53 129.44

44 AVLab 1,079.83 134.98

45 HR 830.64 103.83

46 AVLab 1,183.66 147.96

47 TSR 1,150.94 143.87

48 Dev/Test 3,922.47 490.31

49 FIN 13,451.78 1,681.47

50 TSR 1,726.89 215.86

51 Dev/Test 5,999.08 749.88

52 Dev/Test 4,753.11 594.14

53 TSR 2,389.81 298.73

54 AVLab 1,089.06 136.13

55 Dev/Test 8,088.99 1,011.12

56 IT 959.85 119.98

57 TSR 2,423.06 302.88

58 IT 2,796.49 349.56

59 TSR 1,396.86 174.61

60 AVLab 1,070.60 133.83

61 TSR 1,359.47 169.93

62 Dev/Test 6,433.87 804.23

63 FIN 1,384.40 173.05

64 HR 1,324.41 165.55

65 AVLab 1,861.28 232.66

66 TSR 2,340.08 292.51


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67 AVLab 1,172.13 146.52

68 TSR 1,708.26 213.53

69 Dev/Test 2,297.18 287.15

70 AVLab 1,529.76 191.22

71 AVLab 1,077.53 134.69

72 AVLab 3,128.75 391.09

73 Dev/Test 5,865.43 733.18

74 TSR 1,115.37 139.42

75 TSR 2,327.21 290.90

76 AVLab 6,598.98 824.87

77 IT 896.95 112.12

78 TSR 2,373.49 296.69

79 AVLab 1,038.30 129.79

80 TSR 1,615.14 201.89

81 HR 830.64 103.83

82 AVLab 2,930.32 366.29

83 TSR 2,209.65 276.21

84 AVLab 4,628.52 578.56

85 AVLab 1,038.30 129.79

86 IT 1,085.04 135.63

87 Dev/Test 7,225.22 903.15

88 FIN 2,422.70 302.84

89 IT 4,925.80 615.73

90 AVLab 1,084.45 135.56

91 Dev/Test 6,646.84 830.86

92 FIN 969.08 121.14

93 AVLab 1,038.30 129.79

94 AVLab 1,075.22 134.40

95 AVLab 1,490.54 186.32

96 Dev/Test 5,676.24 709.53

97 AVLab 6,922.01 865.25

98 Dev/Test 922.93 115.37


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99 AVLab 1,061.38 132.67

100 AVLab 7,325.80 915.72

101 AVLab 1,359.02 169.88

c. PAG-IBIG FUNDor HOUSING DEVELOPMENT MUTUAL FUND

The coverage of the Pag-IBIG Fund or Housing Development Mutual Fund

(HDMF) shall be mandatoryupon all employees covered by the Social Security

System (SSS) and/or the Government Service Insurance System (GSIS), and their

respective employers. However, the coverage of the employees whose monthly

compensation is less than four thousand pesos (P4,000) shall be voluntary.

Upon membership, employers and employees shall contribute an amount

according to the following percentages but not exceeding one hundred pesos

(P100):

a. Employees earning not more than one thousand five hundred pesos(P1,500) per month shall contribute one percent (1%)

b. Employees earning more than one thousand five hundred pesos (P1,500)per month shall contribute two percent (2%)

c. All employers --- two percent (2%) of the monthly compensation of thecovered employees.

CONTRACTING AND SUB-CONTRACTING (DEPARTMENT ORDER

18-2002)

Contracting and subcontracting arrangements are expressly allowed by law, but

may be subject to regulations consistent with the promotion of employment,

protection of workers welfare, and enhancement of industrial peace and the rights

of the workers to self-organization and collective bargaining.

Contractors and subcontractors as well as other employees, are entitled to all the

rights and privileges, and are subject to all the duties and responsibilities which

the Labor Code, as amended, attaches to every employee-employer relationship.

e.SOCIAL SECURITY SYSTEM

The following are the persons mentioned in the R.A 1161 or known asSocial Security Law that are compulsorily to be a member of SSS.


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A) SSS shall be compulsory upon all employees not over sixty yearsof age and their employers: Provided, That any benefit already earned byemployees under private benefit plans existing at the time of the approval of thisAct shall not be discontinued, reduced or otherwise impaired: Provided, further,That private plans which are existing and in force at the time of compulsory

coverage shall be integrated with the plan of the SSS in such a way where theemployer's contribution to his private plan is more that that required of him.

B) Filipinos recruited in the Philippines by foreign-based employersfor employment abroad may be covered by the SSS on a voluntary basis.

C) SSS shall also be compulsory upon all self-employed personsearning P1,800 or more per annum: Provided, That the effectivity of coverage ofcertain groups of self-employed shall be determined by the Commission undersuch rules and regulations it may prescribe: Provided, further, That the effectivityof the coverage of the following self-employed persons shall be in accordancewith section ten (b) hereof:

1. All self-employed professionals licensed by the ProfessionalRegulations Commission or those licensed to practice law.

2. Partners and single proprietors of businesses.

3. Actors and actresses, directors, scriptwriters and news correspondentswho do not fall within the definition of the term "employee" in sectioneight (d) of this Act.

4. Professionals athletes, coaches, trainers licensed by the Games and

Amusement Board as well as jockeys and trainers licensed by thePhilippine Racing Commission.

SSS Registration

You are also required to enroll your employees under the Social SecuritySystem (SSS) program, which provides insurance and protection forprivate-sector employees, including resident foreign employees. SSSbenefits include disability pension, retirement,funeral benefit, sicknessallowance, maternity and paternity leave and loans.

If you are the owner of a single proprietorship business, you shouldaccomplish and submit SSS Forms R-1 (Employer's Data Record) and R-1A (Initial or Subsequent List of Employees). If your business is apartnership or a corporation, you also need to submit your articles ofpartnership or incorporation.

You should also require your employees to secure an SS number and that


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that they are reported for coverage under the SSS;

You must report all employees for SS coverage within thirty (30) daysfrom the date of employment by submitting an accomplished SSS Form R-1A (Employment Report) at the nearest SSS office. You are also required

to deduct from your employees salaries the monthly SS contributionsbased on the schedule of contributions and remit these contributions to anySSS-accredited bank/SSS Head Office/ SSS selected branches on orbefore the 10th day following the month when said contributions are dueand applicable.

SSS Benefits

The Social Security System (SSS) provides insurance and protection for

private-sector employees, including resident foreign employees. SSSbenefits include disability pension, retirement, funeral benefit, sicknessallowance, maternity and paternity leave and loans.

a. PAG IBIG FUND

Pag-IBIG is an acronym which standsfor PagtutulungansaKinabukasan: Ikaw, Bangko, Industria at Gobyerno. Ineffect, Pag-IBIG harnesses these four sectors of our society to provide itsmembers with adequate housing through as effective savings scheme.

CoverageThese guidelines shall cover the development and construction of low costhousing units in Metro Manila and highly urbanized cities, and socialized housingunits in the provinces by Pag-IBIG Fund.

Objectives

1. To provide low-cost and socialized house and lot packages/condominiumunits either for rent or for sale to low income Pag-IBIG members whocannot afford the housing packages available in the market.

2.

To enable Pag-IBIG Fund to perform its mandate by using its funds toprovide decent and affordable condominium units as well as house and lotpackages for sale to eligible Pag-IBIG Fund members nationwide.

3. To stimulate competition that will bring about better housing packages interms of price and development that will redound to the benefit not only ofPag-IBIG Fund members but also of the public in general.


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4. To help solve the housing backlog by generating further demand forhousing through the provision of affordable condominium units and houseand lot packages.

5. To equitably distribute nationwide economic opportunities generated fromhousing production, and in the process, stimulate stability brought about

by economic development.6. To provide an opportunity for Local Government Units (LGUs) to complywith R.A. 7279 by identifying and providing land for socialized housing.

7. To simplify and facilitate the processing of end-user financing for eligiblePag-IBIG Fund members, given that the projects are owned by Pag-IBIGFund.

8. To develop further sense of ownership, pride and confidence amongmembers of the Fund, knowing fully well that the projects beingconstructed are direct investments made from their savings with theinstitution.

9. To generate more membership to Pag-IBIG Fund.

10.

To develop and dispose acquired properties of the Fund.11.

f.PHILHEALTH

The National Health Insurance Program was established to provide health

insurance coverage and ensure affordable, acceptable, available and accessible

health care services for all citizens of the Philippines. It shall serve as the means

for the healthy to help pay for the care of the sick and for those who can afford

medical care to subsidize those who cannot. It shall initially consist of Programs I

and II or Medicare and be expanded progressively to constitute one universal

health insurance program for the entire population. The program shall include a

sustainable system of funds constitution, collection, management and

disbursement for financing the availment of a basic minimum package and other

supplementary packages of health insurance benefits by a progressively

expanding proportion of the population. The program shall be limited to paying

for the utilization of health services by covered beneficiaries. It shall be

prohibited from providing health care directly, from buying and dispensing drugs

and pharmaceuticals, from employing physicians and other professionals for the

purpose of directly rendering care, and from owning or investing in health care

facilities. (Article III, Section 5 of RA 7875 as amended)

g.BUREAU OF INTERNAL REVENUE


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The Bureau of Internal is an attached agency ofDepartment ofFinance.BIR collects more than one-half of the total revenues of thegovernment.

The following are provided in the R.A 8424

Individuals engaged in business or practice of profession and juridicalentities, unless otherwise exempted, shall:

1. Pay Annual Registration Fee, if applicable;2. Secure COR;3. Proceed to Secondary Registration;4. Get Ask for Receipt notice, if applicable; and5. Attend the taxpayers initial briefing to be conducted by the BIR

district office for new registrants in order to apprise them of their rightsand duties/responsibilities. In lieu of the briefing, the BIR district officemay distribute information materials on registration to its new applicantsin CD format to be developed by the Taxpayer Assistance Service (TAS).

Procedures and Policies on secondary registration shall beprescribed in a separate Regulation.

PRESCRIBED PERIODS TO COMPLETE PRIMARY REGISTRATIONEvery person subject to any internal revenue tax to be filed/paidperiodically shall complete its registration with the BIR as follows:

1. On or before the commencement of business2. Before payment of any tax due3. Before or upon filing of any applicable tax return,

statement or declaration as required by the Code,

4.

Within ten (10) days from date of employment

TSPI in determining its gross receipt subject to 5% tax has to comply withthe requirements of RR 11-2005.

The Bureau of Internal Revenue (BIR) had developed a strategy on auditby means of its benchmarked data to assess whether a certain industrycorrectly reported its income for tax purposes. BIR Benchmark showedthat TSPI substantially complied with such requirements.

h.City Hall

Business Permits and Licensing or Mayors Permit

The business permit and licensing is one of the major tax collectionfunctions of the Local Government Unit. The collection on business permits andlicenses, being the primary source of the Municipality's income lay thebenchmark from which the plans and programs is established. The taxcomputation is based on the gross annual income of a business entity and some
http://en.wikipedia.org/wiki/Department_of_Finance_(Philippines)http://en.wikipedia.org/wiki/Department_of_Finance_(Philippines)http://en.wikipedia.org/wiki/Department_of_Finance_(Philippines)http://en.wikipedia.org/wiki/Department_of_Finance_(Philippines)


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other fees. A newly established business tax due computation is based on theircapital outlay. They can choose from annual, semi-annual and quarterly paymentsof tax dues. This function is being given to the local government code as beingprovided to the provisions of R.A 7160 or known as Local Government Code.

i. Barangay Hall

The barangay is part of the procedure in getting business permit andlicensing. Once a person seeking to build or start business, the one of the firstthing to do is to have a business permit where you can get it in the Municipalhall/City Hall. The barangay just became part of it because one of therequirements is to get a barangay clearance or permit where the area of thebusiness will be situated or held.

j.SECURITIES AND EXCHANGE COMMISSION

The agency of theGovernment of the Philippines responsible for regulating

thesecurities industry in thePhilippines.The SEC is an agency within theOffice of the

President of the Philippines.

MAJOR FUNCTIONS OF SEC

Its major functions include registration of securities, analysis of every registered

security, and the evaluation of the financial condition and operations of applicants for

security issue.[6]

The functions of the SEC are defined in Section 5 of the Securities Regulation Code, and

include the following major areas:

Supervision over all registered business entities in the country, including suspensions

and revocations of their registrations

Policymaking with regard to the market in securities

Control over and approval of security registration statements

Power to investigate violations of securities laws and to impose sanctions for such

violations

Power to issuesubpoenas,punish forcontempt,and issuecease and desist orders in

furtherance of its law enforcement mission
http://en.wikipedia.org/wiki/Government_of_the_Philippineshttp://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Philippineshttp://en.wikipedia.org/wiki/Office_of_the_President_of_the_Philippineshttp://en.wikipedia.org/wiki/Office_of_the_President_of_the_Philippineshttp://en.wikipedia.org/wiki/Securities_and_Exchange_Commission_(Philippines)#cite_note-6http://en.wikipedia.org/wiki/Securities_and_Exchange_Commission_(Philippines)#cite_note-6http://en.wikipedia.org/wiki/Securities_and_Exchange_Commission_(Philippines)#cite_note-6http://en.wikipedia.org/wiki/Subpoenahttp://en.wikipedia.org/wiki/Contempthttp://en.wikipedia.org/wiki/Cease_and_desisthttp://en.wikipedia.org/wiki/Cease_and_desisthttp://en.wikipedia.org/wiki/Contempthttp://en.wikipedia.org/wiki/Subpoenahttp://en.wikipedia.org/wiki/Securities_and_Exchange_Commission_(Philippines)#cite_note-6http://en.wikipedia.org/wiki/Office_of_the_President_of_the_Philippineshttp://en.wikipedia.org/wiki/Office_of_the_President_of_the_Philippineshttp://en.wikipedia.org/wiki/Philippineshttp://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Government_of_the_Philippines


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1. Laws that govern the registration of companies and partnerships at the

SEC?

Securities Regulation Code (R.A. 8799)

P.D. 902-A as Amended

Corporation Code of the Philippines

Civil Code (Partnerships)

2. Entities that are registered with the SEC?

Stock corporations (Including foreign corporations e.g. branch offices,

representative offices, regional headquarters or regional operating

headquarters)

Non-stock corporations (Foundations, associations, non-government

organization, religious organization, etc.)

Partnerships (General and limited partnerships)

6. Characteristics or Nature of the Services

a. Customer Support Services

TSPI provides continuous first-line support (other than malware removal services)

in the form of electronic assistance in particular via mail and chat, and technical

information to customers of the parent TSI on a 24/7 English-language basis.

It also provides malware removal services on a 24/7 English-language basis for

customers located in the Asia Pacific region. Feedback reports are submitted to

ThreatTrack Security Inc. as it may reasonably request from time to time.

b.

Software Application Development

TSPI performs software application development as required by TSI to suit with

its customers requirements.

c. Software Maintenance

Software maintenanceinsoftware engineering is the modification of a softwareproduct after delivery to correct faults, to improve performance or other attributes.

Maintenance involves fixingdefects of sofware. Majority or over 80% of the

maintenance effort is used for non-corrective actions. Reports showed that inreality, software maintenance are functionality enhancements to the system.

Bug-fixing services are also included in the maintenance services.

7. F.A.R. Analysis
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a. Analysis of Functions or Services Performed

TSPI perform services to its parent company which includes research and

development, information and technology services and customer support services.

b. Analysis of Assets Used in Business

Total assets used by TSPI in its business operation amounted to Php

48,132,827.00 composed of leasehold improvements, transportation equipments,

furniture and fixtures and office equipments.

c. Analysis of Risks Assumed

No risk assigned by TSI to TSPI except for the maintenance of confidential and

sensitive information related to its processes and softwares.

8. Selection of Transfer Pricing Methods

COMPARABLE UNCONROLLED METHOD (CUP)

The comparable price method is the simplest way of determining the arms-length nature

of intercompany based on the price in comparable uncontrolled transactions. It requires that there

be similar transactions between unrelated parties to use for comparison. The method requires that

the goods subject of the transfer pricing analysis be standard enough to be old on an open

market.

A comparability analysis under the CUP Method shall take into account the following:

1. Product characteristics such as physical features and quality;

2. If the product is in the form of services, the nature and extent of such services provided;

3. Whether the goods sold are compared at the same points in the supply of production

chain;

4. Product differentiation in the form of patented features such as trademarks, design, etc.;

5. Volume of sales if it has an effect of price;

6. Timing of sale if it is affected by seasonal fluctuations or other changes in market

conditions;

7.

Whether cost of transport , packaging, marketing, advertising, and warranty are included

in the deal;

8. Whether the products are solid in places where the economic conditions are the same and


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9. Whether a business strategy is adopted in the controlled transactions.

The Comparable Uncontrolled Price Method as used by TSPI consist of comparison of

service fees paid to its services by the parent company which is contained in the service

agreement.

RESALE PRICE METHOD (RPM)

The resale price method begins with the price at which a product that has been purchased

from an associated enterprise is resold to an independent enterprise. It compares the gross profit

margin earned in the controlled transaction to the gross profit margin realized in comparable

uncontrolled transactions.

The Resale Price Method (RSM) is not applicable to TSPI.

COST PLUS METHOD (CPM)

The cost plus method compares a selling price using cost + overhead + profits method

arrived at in dealing with an arms length party to the actual cost + overhead to arrive at the

mark-up %. The mark-up so calculated plus total actual transfer cost will result in the transfer

price.

In computing for the arms length price using the Cost Plus Method (CPM), first to

consider is the cost incurred by the supplier goods or services in the controlled transaction. A

reasonable amount is then added to the cost considering the functions performed and the market

conditions prevalent during the transaction. After adding the cost plus mark up, the cost is most

useful for the sale of semi-finished goods between associated parties with long-term supply

contracts provision of services.

TSPI uses the cost plus method in billing its services. It considers all the cost incurred in

the Philippines and a mark-up of 6% (see matrix of comparables.)

TRANSACTIONAL PROFIT METHODS (TPM)

The two methods under the transactional profit methods are:

A. Transactional Net margin Method (TNMM)


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B. Profit Split Method (PSM), further divided into:

a. Residual Profit Split

b. Contribution Profit Split

This method examinees the profits arising from the controlled transaction or transaction between

associated enterprises.

A. Transactional Net Margin Method (TNMM)

The transactional net margin method (TNMM) examines the profit margin relative to an

appropriate base (e.g. costs, sales, assets) that a taxpayer realizes from a controlled transaction

(or transaction that are appropriate to aggregate under the principles of Chapter. Thus, a

transactional net margin method operates in a manner similar to the cost plus and resale price

methods. This similarly means that in order to be applied reliably, the transactional net margin

method must be applied in a manner consistent with the manner which the resale price of cost

plus method is applied. This means in a particular that the net margin of the taxpayer from the

controlled transaction should ideally be established by reference to the net margin that the same

taxpayer earns in comparable uncontrolled transactions.

The Transactional Net Margin Method (TNMM) as applied to TSPI yield a net margin

result of 3.80% higher than the average net margin of comparables which is 2.65%. Acceptable

Benchmark Rates of the Bureau of Internal Revenue for income tax rate is 3.90% in which TSPI

is not covered due to its enjoyment of tax holidays as PEZA registered enterprises paying only

5% of gross income for BIR purposes.

B. Profit Split Method (PSM)

The profit split method is generally used to remove the effect of special conditions imposed

or present in the transactions between related or associated enterprise by comparing the division

of profits between uncontrolled or independent enterprise engaging on similar transactions or

business activities.The first step is to identify the combined profits to be split from the controlled

transactions in which the associated enterprises are engaged. It then splits those profits between

the associated enterprises on an economically valid basis that approximates the division of

profits that would have been anticipated and reflected in an agreement made at arms length.


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One strength of the profit split method is that it generally does not rely directly on closely

comparable transactions, and it can therefore be used in cases when no such transactions between

independent enterprises can be identified. Another strength is that under the profit split method,

it is likely that either party to the controlled transaction will be left with an extreme and

improbable profit result, since both parties to the transaction are evaluated.

a. Residual Profit Split

In the residual profit split, the combined profits are split in two ways:

Each associated enterprise is allocated in arms length remuneration for its non-

unique contributions in relation to the controlled transactions in which it is engaged.

The initial remuneration is determined by applying one of the traditional transaction

methods or a transactional net margin method by reference to the remuneration of

comparable transactions between independent enterprises.

Any residual profit (or loss) remaining after the first stage division is allocated based

on the analysis of facts and circumstances taking into consideration the unique

contribution of each participant to the business transactions.

TSPI considers Residual Profit Split Method as one of the acceptable method

considering that the business of the parent is highly integrated. However, a Profit and

Loss Statement of the parent Threattrack Security Inc. showed a net loss of

$6,442,000 as of December 31, 2013.

b. Contribution Profit Split

The combined profits coming from the profits of associated enterprises in their

controlled transactions, are split or divided between associated enterprises based on

their contribution to the profit or the functions performed in the controlled

transactions, which should be substantiated by external market information showinghow independent enterprises would have divided profits in similar circumstances.

TSPI does not consider using the Contribution Profit Split Method because it is

purely doing services to its parent. It doesnt contribute assets and other intangibles.


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The Best Method Rule

The best methods considered by TSPI are Cost Plus Method and Residual Profit

Split Method. Residual Profit Split Method cannot be applied in this case because

the parent incurred a net loss from operation hence, no profit realized during the

period. Cost Plus Method is used because it is the most appropriate method that

yield positive result.

Election of CPM as the Best Method

Cost Plus Method as the best method showed a mark-up of 6% on its total cost

which is comparable to other companies in the industry. See matrix of

comparables in page.

9. Economic Analysis

a.

Economic Conditions and Economic Information of Business ProcessOutsourcing in the Philippines

10.Selection of the Tested Party

a. Less Complex Functions


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TSPI used the Tested Party with a less complicated functions such as involved in

the services of research and development, information and technology services

and customer support services.

b. Financial Data

Financial information of different comparables are found in the preceding pages

of this report.

11.List of Comparables

a. Rationale

Comparables were chosen based on their involvement in the same industry where

TSPI functioned. Data were gathered based on their availability and

comparability taking into account the independence of the companies involved.

b. Comparable Search

The following list of comparables were selected:

a) A+B Expedio Integrated Marketing Communication, Inc..

b) Nexus Technologies, Inc. & Subsidiaries

c) Point Business & Industrial Services, Inc.

d) Pointwest Technologies Corporation

e) Quantium Solutions (Philippines)

f) Royal 168 Service, Inc.

g) Semantrix, Inc

h) Shellsoft Technology Corporation

i) Strategic Synergy, Inc. & Subsidiaries

j)

Strategies Synergy, Inc.

k) Subic Nexus Technologies, Inc.

l) Trend Micro Incorporated

m)Threat Track Security Phils. Inc.


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12.Comparability Analysis

a. Matrix

Name of CompanyGross

Profit Rate

Operating

Profit

Net

MarginTotal Assets Total Liabilities Total Equit

A+B EXPEDIO INTEGRATED MARKETING

COMMUNICATIONS, INC. 14.60% 3.00% 2.16% 12,654,446.00 1,444,375.00 11,210,072

ARINSO INTERNATIONAL PHILIPPINES, INC 17.00% 9.00% 6.54% 399,056,582.00 338,388,300.00 60,688,282

NEXUS TECHNOLOGIES, INC. AND SUBSIDIARIES 11.00% 1.58% 1.95% 2,472,888,756.00 1792835071 680,053,685

POINTS BUSINESS AND INDUSTRIAL SERVICES,

INC. 10.00% 6.00% 0.60% 36,652,365.00 38,540,559.00 1,422,853

POINTWEST TECHNOLOGIES CORPORATION 17.00% 7.00% 3.27% 10,928,060.00 7,167,754.00 3,760,306

ROYAL 168 SERVICE INC. 16.00% 4.90% 3.40% 13,508,556.28 2,494,489.48 11,014,066

SEMANTRIX, INC. 15.00% -1.10% -1.10% 4,654,747.00 4,639,851.00 4,654,747

SHELLSOFT TECHNOLOGY CORPORATION 16.00% 10.00% 6.56% 375,945,583.00 104,842,019.00 91,250,893

STRATEGIC SYNERGY, INC. AND SUBSIDIARY 8.00% -2.00% -2.10% 244,010,284.00 136,440,340.00 107,569,944

STRATEGIES SYNERGY, INC. 11.00% 2.00% 2.77% 254,215,478.00 131,957,739.00 122,257,739

SUBIC NEXUS TECHNOLOGIES INC. 11.00% 6.00% 7.00% 208,833,707.00 159,224,831.00 49,608,876

TREND MICRO INCORPORATED 5.00% 4.00% 3.00% 715,504,628.00 408,554,601.00 306,950,027

THREAT TRACK SECURITY PHILS., Inc. 6.00% 4% 3.80% 48,132,827.00 13,488,787.00 34,644,040

TOTAL 157.60% 54.38% 37.85%

AVERAGE 12.12% 4.18% 2.65%

26.08%


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BIR Benchmark for BPO Gross Profit

BIR Benchmark for BPO IT Rate 3.90%

BIR Benchmark for BPO VAT Rate 6.10%

Note: TSPI is a PEZA registeredenterprise subject to 5% tax.

b. Financial Information of Comparables

(1)

Name of Company: A+B EXPEDIO INTEGRATED MARKETING COMMUNICATIONS,INC.

Address: 5/F Magnitude II Bldg., E. Rodriguez Jr. Avenue, Bagumbayan, Quezon City.

Kind of Business or Service: Carry on the business of advertising and other related services.

Gross Profit: 14.6%

ROCE: 22%

Operating Profit: 3%

Net Margin: 2.16%

Total Assets: 12,654,446

Total Liabilities: 1,444,375Total Equity: 11,210,072

Income Statement 2012 2013 Average

Sales 91,737,310 82,990,189 87,363,749.50

Cost of Goods Sold/Services 81,961,656 70,829,226 76,395,441Gross Profit 9,775,653 12,160,964 10,968,308.5


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Operating Expenses 8,265,135 9,588,916 8,927,025.5

Depreciation 122,851 87,037 104,944Operating Profit 1,510,518 2,572,047 2,041,282.5

Interest Expense - - -

Assets 2012 2013 Average

Cash & Equivalents 5,665,704 6,994,583 6,330,143.5

Inventories - - -

Accounts Receivable - - -Plant, Property & Equipment 667,606 696,293 681,949.5

Investments - - -

Equity 1,409,638 11,210,072 6,309,855

Total Assets 9,409,327 11,958,153 10,683,740Operating Assets - - -

Selected Liabilities 2012 2013 Average

Total Liabilities 8,668,294 1,444,375 5,056,334.5

Current Liabilities 8,667,294 1,444,375 5,055,834.5Accounts Payable 8,667,294 1,444,375 5,055,834.5

(2)

Name of Company:ARINSO INTERNATIONAL PHILIPPINES, INC.

Address: 4F Bldg. 1, Eton Cyberpod Corinthian, Ortigas Ave. corner EDSA, Quezon City.

Kind of Business or Service: Focusing on full range human resource transactions, businessconsulting, operations and integration services and other business related processes using

IT-enabled-facilities for international clients and importation of machinery, equipment,

tools, goods, wares, articles, or merchandise.

Gross Profit: 17%

ROCE: 78.53%


Net Margin: 6.54%


Total Liabilities: 338,388,300

Total Equity: 60,688,282



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Sales 898,069,447 1,167,451,143 1,032,760,295

Cost of Goods Sold/Services 850,886,885 959,602,716 905,244,800.5Gross Profit 47,182,562 207,848,427 127,515,494.5

Operating Expenses 203,456,446 116,358,962 159,907,704Depreciation 22,973,939 30,711,450 26,842,694.5

Operating Profit (156,273,884) 91,489,465 (32,392,209.5)

Interest Expense 15,338,833 10,841,393 13,090,113


Cash & Equivalents 17,604,757 23,328,278 20,466,517.5

Inventories - - -

Accounts Receivable 42,904,727 39,159,146 41,031,936.5Plant, Property & Equipment 60,001,851 59,134,798 59,568,324.5

Investments - - -Equity (412,397,676) 60,668,282 (175,864,697)

Total Assets 272,552,106 399,056,582 335,804,344Operating Assets 248,810,609 377,952,102 313,381,355.5


Total Liabilities 684,949,782 338,388,300 511,669,041

Current Liabilities 664,669,315 322,975,851 493,822,583Accounts Payable 110,400,349 156,942,465 133,671,407

(3)

Name of Company: NEXUS TECHNOLOGIES, INC. AND SUBSIDIARIES

Address: G/F, Don Pablo Building, 114 Amorsolo St., Legaspi Village, Makati City.

Kind of Business or Service: Information Technology (IT) solutions catering to variousindustries including but not limited to the sale of hardware, packaged software and

services.

Gross Profit: 11%

ROCE: 3.4%

Operating Profit:

Net Margin: 1.95%

Total Assets: 2,472,888,756

Total Liabilities: 1,792,835,071




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Sales 4,171,189,161 4,788,447,062 4,479,818,111.50

Cost of Goods Sold/Services 3,778,131,470 4,353,989,939 4,066,060,704.50Gross Profit 486,246,820 559,735,235 522,991,027.50

Operating Expenses - - -Depreciation 15,342,039 24,736,701 20,039,370

Operating Profit 61,787,151 77,489,369 69,638,260

Interest Expense (27,254,797) (40,800,906) (34,027,851.5)


Cash & Equivalents 101,637,348 112,344,948 106,991,148

Inventories 523,283,204 403,494,937 463,389,070.50

Accounts Receivable 1,041,572,395 1,213,278,745 1,127,425,570Plant, Property & Equipment 256,124,080 266,777,928 261,451,004

Investments 3,183,336 3,424,493 3,303,914.50Equity 621,762,190 680,053,685 650,907,937.50

Total Assets 2,208,954,229 2,472,888,756 2,340,921,492.50Operating Assets 2,132,324,919 2,224,950,810 2,178,637,864.50


Total Liabilities 1,587,192,039 1,792,835,071 1,690,013,555

Current Liabilities 1,434,529,146 1,689,440,297 1,561,984,721.50Accounts Payable 563,432,978 728,105,690 645,769,334

(4)

Name of Company: POINTS BUSINESS AND INDUSTRIAL SERVICES, INC.

Address: Room 1840 RG Bldg., E. Rodriguez sr., Ave., Cubao, Quezon City.

Kind of Business or Service: Manpower services.

Gross Profit: 10%

ROCE: 15%

Operating Profit: 6%Net Margin: 0.6%



Total Equity: (1,422,853)



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Sales 11,400,000 11,063,286 11,231,643

Cost of Goods Sold/Services 10,159,225 9,956,958 10,058,091.5Gross Profit 1,240,775 1,106,329 1,173,552

Operating Expenses 1,233,310 417,460 825,385Depreciation 255,000 255,000 255,000

Operating Profit 7,466 688,869 348,167.5

Interest Expense 500 - 500


Cash & Equivalents 11,548 259,701 135,624.5

Inventories - - -

Accounts Receivable 16,545,542 17,940,582 17,243,062Plant, Property & Equipment 17,118,202 16,863,202 16,990,702

Investments

Equity (1,905,061) (1,422,853) (1,663,957)

Total Assets 34,189,723 36,652,365 35,421,044Operating Assets 34,189,723 36,652,365 35,421,044



Current Liabilities 16,817,620 19,264,394 18,041,007Accounts Payable 16,817,620 19,264,394 18,041,007

(5)

Name of Company: POINTWEST TECHNOLOGIES CORPORATION

Address: 12 Floor Citibank Center, 8741 Paseo de Roxas, Makati City.

Kind of Business or Service: Developing, designing and marketing all kinds of information

technology (IT) systems, or parts thereof, including but not limited to hardware andsoftware products.

Gross Profit: 17%

ROCE: 1.34%


Net Margin: 3.27%




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Sales $11,125,365 $11,751,936 11,438,650.5Cost of Goods Sold/Services $9,520,342 $9,658,818 9,589,580

Gross Profit $1,605,023 $2,093,118 1,849,070.5Operating Expenses $794,257 1,262,882 1,028,569.5

Depreciation $55,157 $70,772 62,964.5

Operating Profit $810,766 $830,236 820,501

Interest Expense 338 $10,565 5,451.50


Cash & Equivalents $4,001,340 $2,805,810 3,403,575

Inventories - - -Accounts Receivable 5,940,664 5,683,745 5,812,204.5

Plant, Property & Equipment 125,586 122,876 124,231Investments 983,580 983,580 983,580

Equity 6,196,082 3,760,306 4,978,194

Total Assets $13,514,683 $10,928,060 12,221,371.5

Operating Assets 11,771,995 8,813,702 10,292,848



Current Liabilities 5,756,136 5,576,913 5,666,824.5

Accounts Payable $2,572,182 2,726,274 2,649,228

(6)

Name of Company: ROYAL 168 SERVICES INC.

Address: NGA Building Villa Adelina II Subdivision Pulo, Cabuyao LagunaKind of Business or Service: Offer, provide, and perform management, administrative, andtechnical services to business, commercial, and manufacturing establishments without

engaging in the management of funds, securities portfolio and similar assets of the engaged

entity

Gross Profit: 16%

ROCE: 3.3%

Operating Profit: 4.9%


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Net Margin: 3.4%

Total Assets: 13,508,556.28

Total Liabilities: 2,494,489.48

Total Equity: 11,014,066.80


Sales 28,377,483.33 28,826,719.05 28,602,101.19

Cost of Goods Sold/Services 24,004,340.88 24,205,559.53 24,104,950.21Gross Profit 4,373,142.45 4,621,159.52 4,497,150.99

Operating Expenses 2,440,271.45 3,202,612.45 2,821,441.95Depreciation 219,990 219,990 219,990

Operating Profit 1,932,871 1,418,547.07 1,675,709.04

Interest Expense - 138,000 138,000


Cash & Equivalents 3,298,268.23 5,068,315 4,183,291.62Inventories - - -

Accounts Receivable 5,740,818.35 7,104,961.13 6,422,889.74Plant, Property & Equipment 1,120,040 900,050 1,010,045

Investments - - -Equity 10,021,093.85 11,014,066.80 10,517,580.33

Total Assets 10,796,822.54 13,508,556.28 12,152,689.41

Operating Assets 10,796,822.54 13,508,556.28 12,152,689.41


Total Liabilities 775,728.69 2,494,489.48 1,635,109.09Current Liabilities 775,728.69 2,494,489.48 1,635,109.09

Accounts Payable 195,867.26 68,925.36 132,396.31

(7)

Name of Company: SEMANTRIX, INC.Address: From: Suites 709 Medical Towers, 103 Herrera St., Legaspi Village Makati CityTo: Room 205, 2

ndFloor, Diplomat Condominium, Corner Russel Street, Pasay City.

Kind of Business or Service: Corporate services, job contracting business, providingadvisory and consultative services and providing expert guidance and directions.

Gross Profit: 15%

ROCE: 70%

Operating Profit:


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Net Margin: -1.1%





Sales 9,230,066 9,194,379 9,212,222.50

Cost of Goods Sold/Services 7,822,917 7,876,147 7,849,532Gross Profit 1,407,149 1,318,232 1,362,690.50

Operating Expenses (106,932) (443,844) (275,388)Depreciation 252,325 307,744 280,034.50

Operating Profit (106,932) (443,844) (550,776)



Cash & Equivalents 1,044,994 206,032 625,513Inventories - - -

Accounts Receivable 3,168,836 1,786,199 2,477,517.50Plant, Property & Equipment 296,625 547,610 422,117.50

Investments (1,340) (167,675) (84,507.5)Equity 14,896 121,828 68,362

Total Assets 4,654,747 2,618,720 3,636,733.50

Operating Assets 4,594,747 2,558,720 3,576,733.50


Total Liabilities 4,639,851 2,496,892 3,568,371.50Current Liabilities 489,742 240,145 364,943.50

Accounts Payable 4,150,109 2,256,747 3,203,428

(8)

Name of Company: SHELLSOFT TECHNOLOGY CORPORATION

Address: 3F Megastate Building, Araneta Avenue cor Agno St., Quezon City.

Kind of Business or Service: Buying, selling, distributing, marketing at wholesale and retail

in so far as may be permitted by law, all kinds of goods, commodities, wares and

merchandise of every kind and description; to enter into all kinds of contracts for the

export, import, purchase, acquisition, sale at wholesale or retail and other disposition for


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its own account as principal or in representative capacity as manufacturers

representative, merchandise broker, indenters, commission merchant, factors or agents.

Gross Profit: 16%

ROCE: 5.2%


Net Margin: 6.56%Total Assets: 375,945,583




Sales 597,480,979 693,553,158 645,517,068.50

Cost of Goods Sold/Services 511,412,672 580,257,715 545,835,193.50

Gross Profit 89,806,871 117,638,768 103,722,819.50

Operating Expenses 57,451,854 72,107,998 64,779,926

Depreciation 2,428,173 3,675,743 3,051,958

Operating Profit - - -



Cash & Equivalents 72,631,512 71,287,946 71,959,738

Inventories 460,586 200,613 330,599.50

Accounts Rec

Documents

Threattrack TP Executive Summary FINAL (Repaired)