BIR Ruling

November 2, 1977 Philippine Branch of Foreign Corporation, Exemption from Income Tax and from the 15% Remittance Tax on Profits This refers to your letter dated October 25, 1977 requesting a ruling in behalf of your client, JKL Pictures Industries, Inc., based the following facts: "Taxpayer is a corporation, duly organized and existing under and by virtue of the laws of the State of New York, U.S.A., for the purposes, among others of producing and distributing motion pictures and television films. It produces motion pictures and television films in the United States and distributes the same all over the world. "In the Philippines, it distributes its motion pictures and television films to local exhibitor thru a branch office, duly licensed by the Securities and Exchange Commission. The branch files its income tax return and pays the taxes on net income from Philippine sources. "Since the branches, including the Philippine Branch, derive income from the distribution of the films, the production costs of sold films are allocated among the branches. The allocated costs are remitted to the Head Office in the United States" You contend that the remittance by the Philippine branch of its share in the production costs to its Head Office in the United States is not subject to income, remittance or withholding taxes imposed by Sections (24)(b)(1), 24(b)(2) and 53, respectively, of the Tax Code. In reply, I have the honor to inform you as follows: 1. The remittance by the Philippine Branch of its share in the production costs to its Head Office in the United States is not subject to the income tax imposed by Section 24(b)(1) of the Tax Code of 1977. It should be noted that this provision of law imposes income tax on non-resident foreign corporations not engaged in trade or business in the Philippines. In the instant case the taxpayer is a resident foreign corporation subject to the income tax imposed by Section 24(b)(2) of the Tax Code of 1977. For the same reason, the withholding provisions of Sections 53 and 54 of the Tax Code do not apply in this case. 2. The said remittance of production costs is not also subject to the 15% remittance tax on profits remitted abroad, pursuant to Section 24(b)(2) of the Tax Code of 1977. It should be noted that production costs is not considered profit, the same being a mere return on capital which is not considered income. (Sec. 36, Revenue Regulations No. 2). In this connection, it is to be emphasized that the correctness of the amounts remitted as production costs of motion picture and television films produced by your client is subject to verification. Accordingly, the regular corporate income and remittance taxes will be assessed and collected by this Office if it is verified that the amounts remitted by your client to its Head Office do not represent the correct production costs.