BIR Ruling [DA-114-03]

April 8, 2003 BIR RULING [DA-114-03] Section 28 (A) (7) (b); DA-ITAD-193-02 Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Antonette C. Tionko Tax Division Gentlemen : This refers to your letter dated February 7, 2003 requesting for confirmation of your opinion that interest paid on credit-linked Certificates of Deposit by the Standard Chartered Bank (FCDU) ["SCB-FCDU"] Phil. Branch to Societe General France ("SG-France") shall be exempt from Philippine withholding tax pursuant to Section 28(A)(7)(b) of the 1997 Tax Code. It is represented that Standard Chartered Bank Philippine Branch (SCB) is a foreign corporation duly licensed to engage in the banking business in the Philippines; that it is authorized by the Bangko Sentral ng Pilipinas (BSP) to operate an expanded Foreign Currency Deposit Unit (FCDU); that SG-France is a corporation duly organized and existing under the laws of France with principal office at Tour Societe General, 17 Cours Valmy, 92972 Paris La Defense Cedex France; that SG-France has a Philippine branch which has an offshore banking license; that SG-France shall invest in a coupon bearing foreign currency denominated 2-year fixed rate credit linked Certificates of Deposit (CDs) to be issued by SCB-FCDU; that SG-France shall make the said investment directly with SCB-FCDU, without the intervention, participation or benefit of its Philippine branch. In reply, please be informed that Section 28(A)(7)(b) of the 1997 Tax Code provide as follows: Section 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporations. xxx xxx xxx (7) Tax on Certain Incomes Received by a Resident Foreign Corporation. xxx xxx xxx (b) . . . Any income of non-residents, whether individuals or corporations, from transactions with depository banks under expanded system shall be exempt from income tax. (emphasis supplied) Based on the above-quoted provision, it is clear that income derived by non-resident foreign corporations from transactions with depository banks under the Expanded Foreign Currency Deposit System are exempt from income tax. In the instant case, while SG-France maintains a Philippine branch, it is represented that said branch does not have any participation whatsoever in the investment so that any interest derived by SG-France independently of its Philippine branch shall be considered income of SG-France alone, applying the rule enunciated in the case of Marubeni vs. CIR (G.R. No. 76573 dated September 14, 1989), pertinently quoted hereunder: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch." "Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." (emphasis ours) Thus, where a parent company enters into a business transaction without the participation of its branch, the transaction is said to be a separate and distinct activity of the parent company from the branch for tax purposes. ( BIR RULING DA-ITAD-193-02 dated October 29, 2002 ) Considering that SG-France shall invest in the credit linked CDs, without the participation, intervention or benefit of its Philippine branch, SG-France is considered a separate taxpayer from its Philippine branch. Thus, interest income derived from investment in the credit-linked CDs with SCB-FCDU shall be considered as income of SG-France and not of its Philippine branch. And since SG-France is a non-resident foreign corporation, the interest received by SG-France from SCB-FCDU shall, accordingly, be exempt from Philippine income tax and consequently, withholding tax pursuant to Section 28(A)(7)(b) of the 1997 Tax Code. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then, this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group