BIR Ruling [DA-106-06]

March 14, 2006 BIR RULING [DA-106-06] 28 (B) (5); DA-523-03 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: W.U. Villanueva Principal Gentlemen : This refers to your letter dated August 30, 2005 stating that your client, Tomen Corporation-Manila Branch (Branch) is duly registered with the Securities and Exchange Commission (SEC) on April 13, 1967, as the branch office in the Philippines of Tomen Corporation-Japan (Head Office), a corporation organized and existing under the laws of Japan; that the Branch is engaged in the business of construction works as well as the design and supervision thereof, sale and purchase, import and export of various materials, foodstuffs, chemical products and other merchandise; that for the period November 5, 2001 to September 9, 2003, the Head Office inwardly remitted various amounts to the Branch which was used as necessary working capital for the Branch's construction projects; that the Branch was accordingly paid for its working capital expenses by its customers in the normal course of business; that however, since most of the Branch's local projects have either been completed or are in the process of winding down, the Branch currently has minimal working capital requirements in relation to its construction projects; and thus, the Branch intends to remit back previous remittances made by the Head Office for the Branch's working capital. In connection therewith, you now request confirmation of your opinion that the amounts to be remitted back by the Branch to the Head Office, which consist of amounts previously sent by the Head Office to the Branch for construction projects, are not profits and therefore, such remittance is not subject to the branch profit remittance tax (BPRT) as prescribed in Section 28(A)(5) of the Tax Code of 1997. AIcaDC In reply thereto, 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 sources within the Philippines shall not be treated as branch profit unless the same are effectively connected with the conduct of its trade or business in the Philippines." A careful scrutiny of the above-cited section disclosed that any profit remitted by a branch to its head office is subject to the BPRT at the rate of 15%. The term "income" means all wealth which flows into the taxpayer other than as a mere return of capital. (Sec. 36, Income Tax Regulations) Thus, the amounts to be remitted by the Branch to the Head Office, consisting of the amounts previously sent by the Head Office for the construction projects, are not profits but capital contributions of the Head Office and therefore not subject to the BPRT prescribed in Section 28(A)(5), supra . In BIR Ruling No. DA523-03 dated December 16, 2003, this Office ruled that ". . . The remittance of production cost by a branch to its head office is not subject to the 15% profits remittance tax on the ground that production cost is not considered profit, the same being a mere return of capital which is not considered income. ( BIR Ruling No. 025-81 dated January 29, 1981 ). The return of capital is not subject to income tax. ( DA277-03 dated August 21, 2003; DA274-03 dated August 21, 2003; DA286-98 dated June 29, 1998; 010-96 dated January 23, 1996; 184-90 dated September 20, 1990 ) "Accordingly, irrespective of whether accounting profits exists at the time of the remittance, the remittance of assigned capital by QPI Phils. To QPI Cayman is not subject to the 15% branch profit remittance tax, the same being a mere return of capital which is not considered as profits . . . ." SUCH BEING THE CASE, this Office hereby confirms your opinion that the remittance by the Branch to the Head Office of amounts previously sent by the latter for the Branch's construction projects operations, to the extent and in the amount that can be accounted for and substantiated by appropriate documents as such, is not subject to the BPRT prescribed in Section 28(B)(5) of the Tax Code of 1997, since the amounts to be remitted are not profits of the Branch. ACIEaH This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue