BIR Ruling [DA-271-03]

August 20, 2003 BIR RULING [DA-271-03] 25 (A) (5); 053-99 A.M. Sison, Jr. & Associates Suite 2002-A Security Bank Center 6776 Ayala Avenue Makati City Attention: Atty. Carlito P. Egaa Gentlemen : This refers to your letter dated June 27, 2003 stating that your client, Singer Sewing Machine Company Ltd. (SSMCO), is a corporation duly organized and existing under the laws of Bermuda with principal office address at 41 Cedar Avenue, Hamilton HM 12 Bermuda; that it is duly licensed to transact in the business of wholesaling sewing machines of Singer brand and other appliances through Singer Sewing Machine Company Ltd. (Singer), a Philippine Branch with office address at Bonifacio Drive, Port Area, Manila; that due to dizzying changes and/or development in global business practices, and challenges brought, about by stiff competition in the trade, SSMCO has to go into global strategic and corporate restructuring program; that in line with the said program, on January 2, 2003, a Master Deed of Assignment was executed by SSMCO and Singer Philippines, Inc. (SPI) wherein it had transferred on credit effective January 1, 2003, the business operations of Singer including Singer's assets and liabilities, excepting the current and deferred tax payables, that are standing in the books of Singer as of December 31, 2002, to its affiliate, SPI; that the assets of Singer that were transferred/assigned by SSMCO to SPI and their corresponding book value as of December 31, 2002, are as follows: Current Assets Book Value Dec. 31, 2002 Marketable Securities P11,218,209 Accounts Receivable-Net 176,183,628 Inventories-Net 53,949,253 Prepaid Expense 1,284,464 Investments in Affiliate-Equity 16,047,221 Receivable from Affiliates 232,480,033 Property, Plans & Equipment Leased Property 4,449,534 Automotive Equipment 11,225,282 Furniture & Equipment 5,074,148 Accum. Depreciation (15,200,563) Other Assets & Guarantee Deposits 5,680,498 that pursuant to the said program, SSMCO will transfer or assign its unremitted profits in Singer to SPI in exchange for SPI's issuance of approximately 96% of its capital stock to SSMCO; that all of the shares of stock which SPI will issue to SSMCO will then be transferred later on by SSMCO to another affiliate, Singer (Philippines) B.V., a corporation duly organized and existing under the laws of Netherlands which is the parent company of SPI Based on the foregoing representations, you now request confirmation of your opinion that "1. SSMCO shall not be considered to have withdrawn the remittable profits of Singer when the same are transferred to SPI because there is effectively no withdrawal of profits of SSMCO from the Philippines and therefore the 15% Branch Profit Remittance Tax (BRPT) on remittable profits of SSMCO in Singer which SSMCO will transfer/assign to SPI in exchange for SPI's shares of stock shall not be imposed; and "2. The transfer/assignment by SSMC of SPI shares to Singer (Philippines) B.V. is not a transfer/assignment to an unrelated third party because Singer (Philippines) B.V. is an affiliate of SSMCO and the parent company of SPI. Therefore, such transfer/assignment of SPI shares to Singer (Philippines) B.V. should not result in the 15% BPRT." In reply thereto, please be informed that your opinion is hereby confirmed as follows: 1. In BIR Ruling No. 053-99 dated April 19, 1999, this Office ruled that ". . . SLAC shall not be considered to have withdrawn the remittable profits of its Philippine Branch when the same are transferred to Philco. The 15% Branch Profits Remittance Tax (BPRT) under Section 28(A)(5) of the Tax Code of 1997, on remittable profits of SLAC as of the date of transfer of its Philippine branch business to Philco, shall not be imposed because there is effectively no withdrawal of profits by SLAC from the Philippines." ETCcSa Accordingly, since the circumstances in the said ruling are in all fours similar to your case, this Office holds that SSMCO shall not be considered to have withdrawn the remittable profits of Singer when the same are transferred to SPI as there is effectively no withdrawal of profits of SSMCO from the Philippines. Such being the case, the 15% BPRT imposed under Section 28(A)(5) of the Tax Code of 1997 shall not be imposed when the remittable profits of SSMCO in Singer will be transferred/assigned to SPI in exchange for SPI's shares of stock. 2. Section 50 of the Tax Code of 1997 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 organization, trade or business. The spirit and intention of the legislature in enacting Section 50 of the Tax Code of 1997 is to ensure that taxpayers clearly reflect income attributable to controlled transactions and to prevent the evasion of taxes with respect to such transactions. In this regard, the BIR has issued Revenue Audit Memorandum Order (RAMO) No. 1-98, as amended by Revenue Memorandum Order (RMO) No. 61-98, as further amended by RMO No. 63-99 relative to the examination of interrelated companies. In this light, the government is intensifying its conduct of examination of interrelated companies to identify the employment of tax avoidance schemes. The method to be used in determining the arm's-length price depends on the type of transaction-whether the transaction involves a transfer of property, services loans, advances, rentals or arrangements, among others. Inasmuch as Singer (Philippines) B.V. is an affiliate of SSMCO and the parent company of SPI, the transfer/assignment by SSMCO of SPI shares to Singer (Philippines) B.V. is a transfer/assignment to a related party. Nonetheless, the transfer/assignment of SPI shares to Singer (Philippines) B.V. should not result in the 15% BPRT imposed under Section 28(A)(5) of the Tax Code of 1997. 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 Deputy Commissioner Legal & Inspection Group