BIR Ruling [DA-039-05]

January 28, 2005 BIR RULING [DA-039-05] 28 (A) (5); 16-80 International Commercial Bank of China Manila Branch 3/F Pacific Star Bldg., Sen. Gil J. Puyat Ave. cor. Makati Ave. Makati City Attention: Mr. Chia-Jang Liu Vice-President and General Manager Gentlemen : This refers to your letters dated April 5, 2004 and July 2, 2004 requesting information whether there are rules and regulations relative to the taxes imposed if there is a transfer of profit from operations to "assigned capital account". It appears that the International Commercial Bank of China-Manila Branch (ICBC-Manila) is a branch of a foreign bank authorized by the Bangko Sentral ng Pilipinas (BSP) to operate with full banking services as a commercial bank; that ICBC-Manila has complied with the capital requirements imposed by RA 7721 and the implementing BSP Circular No. 21, Series of 1994; that for the year 2003, the operations of ICBC-Manila resulted in a net profit of P180,000,000.00 (after taxes) which was closed to Net Due to Head Office and Other Branches Account. You now pose the question on whether or not the following transactions outlined in your letter will be subject to tax: 1. Increase the assigned capital by a transfer of profit from operations now carried in the Net Due to Head Office Account, i.e.: Debit Due to Head Office Account Credit Assigned Capital, or 2. The net profit is directly credited to the Assigned Capital, whether or not it will be treated differently from the other. In reply, please be informed that Section 28(A)(5) of the Tax Code of 1997, provides that: "(5) Tax on Branch Profits Remittances . Any profit remitted by a branch to its head office shall be subject to a tax of fifteen percent (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: Provided ,That interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages, premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines." As a rule, the remittance of profit from a branch to its head office is subject to a 15% branch profit remittance tax. Under Section 15[b] of Revenue Regulations (RR) No. 2, as amended by RR No. 8-75, any form of remittance, direct or indirect, made to the head office abroad shall be presumed to have been made from the accumulated profits of the branch. In other words, to be subject to the tax, the profits must be remitted to the head office abroad, whether directly or indirectly. It may be said that in your case ICBC-Manila's profits from its operations will not be physically remitted to its head office abroad, however, the above-stated proceeds will be credited to the assigned capital account of ICBC's head office thru the account Net Due to Head Office Account. In effect, the aforesaid profits will be indirectly remitted by ICBC-Manila to its head office in China. It is of course understood that the tax treatment on the transfer of net profits which are credited directly to assigned capital is the same with that of transferring said profits due to head office account. In view of the foregoing, the increase of the assigned capital by way of ICBC-Manila's transfer of its net profits from operations and booking it thru the Net Due to Head Office Account, as well as the net profits which are credited directly by ICBC-Manila to its Assigned Capital will be both subject to 15% branch profit remittance tax based on the total profits applied or earmarked for remittance without deduction for the tax component thereof. Meanwhile, Section 73(B) of the 1997 Tax Code on stock dividends, which you quoted in one of your letters is not applicable, considering that ICBC-Manila as a branch can only remit profits and never declare dividends to its head office. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group