BIR Ruling [DA-432-06]

July 18, 2006 BIR RULING [DA-432-06] R.R. 2-98, as amended; ITAD Ruling 03-04; 197-82; DA-489-05; DA-523-03 Noval & Buag Law Office Unit 2303 23/F, 139 Corporate Center 139 Valero Street, Salcedo Village Makati City 1227 Attention: Atty. Remigio A . Noval Managing Partner Gentlemen : This refers to your letter dated June 26, 2006 requesting confirmation that payments made by your client, COL Limited [Philippine Branch] [hereinafter referred to as "COL-Branch" for brevity] to its head office in Hong Kong [hereinafter referred to as "COL-Head Office" for brevity] for administrative, accounting and logistics services, as well as development and operations assistance on a reimbursement of cost basis are not subject to withholding tax on ordinary income and the branch profit remittance tax. It is represented that COL Head Office is an entity incorporated and existing under and by virtue of the laws of Hong Kong with business address at the 7th Floor, COL Tower, World Trade Square, 123 Hoi Bun Road, Kwun Tong, Kowloon, Hong Kong; that it is engaged in the business of electronic data processing with only one branch worldwide, which is located in the Philippines; that COL-Branch, on the other hand, is the sole branch of COL-Head Office, which is duly licensed with the Philippine Securities and Exchange Commission to transact business in the Philippines under SEC License No. A200016679; that in particular, it is licensed to engage in the business of mainframed-based computing solutions to leading banks and commercial customers; and that it is likewise registered with the Bureau of Internal Revenue under OCN 9RC0000052951, and with registered address at Warehouse 9, Sunblest Compound, Km. 23 West Service Road, South Super Highway, Barangay Cupang, Muntinlupa City 1770. HTcDEa It is further represented that on June 10, 2002, after COL-Branch had been set up in the Philippines, COL-Head Office and COL-Branch executed a Memorandum of Agreement in order to assist COL-Branch in its Philippine operations; that under the said Memorandum of Agreement, COL-Head Office will be assisting COL-Branch in the areas of administration, accounting, logistics, development and operations; that for undertaking such assistance, COL-Branch will remit to COL Head Office annually amounts representing the reasonable share of COL-Branch in the salary and compensation expenses incurred by COL-Head Office; that COL-Branch shall likewise reimburse COL-Head Office for all travel and other expenses properly incurred by it in the provision of services, including any expenses incurred by the latter's employees; and that all the support services under the foregoing Memorandum of Agreement were performed by COL-Head Office outside the Philippines. In reply, please be informed that the rule shaped out by jurisprudence is that we follow the single entity concept wherein the head office and the branch are considered one and the same juridical personality. The branch is considered a mere extension of the head office. Consequently, the branch has no separate and distinct juridical personality from its head office, irrespective of its location (ITAD Ruling No. 03-04, 22 January 2004). Moreover, under Section 36 of Revenue Regulations No. 2, income, in the broad sense, means all wealth which flows into the taxpayer other than as a mere return of capital. It has been a settled rule that reimbursement of cost is merely a return of capital and does not constitute income, and consequently, is not the proper subject of withholding taxes (BIR Ruling No. DA-489-05 dated December 6, 2005; BIR Ruling No. DA-176-04 dated April 6, 2004; BIR Ruling No. DA-438-03 dated December 4, 2003 citing BIR Ruling Nos. DA-158-97 dated April 14, 1997, UN-262-95 dated July 11, 1995 and 245-95 dated July 5, 1995). In BIR Ruling No. 197-82 dated June 17, 1982, this Office ruled that head office expense that has been allocated to the Philippine branch is a deductible expense, and its conversion into foreign investment in the form of additional assigned capital is not subject to withholding tax since the same is a mere reimbursement of expense and is not considered income of the head office. Also, where service fees consist only of actual and direct costs and expenses incurred by a foreign company in rendering services to a Philippine branch, such fees are mere reimbursement of costs which are not subject to income tax and consequently, to withholding tax. (Cited in BIR Ruling No. DA-303-03 dated September 16, 2003 and BIR Ruling No. DA-293-00 dated July 28, 2000). Finally, in BIR Ruling No. DA-523-03 dated December 16, 2003, we have ruled that the remittance of production cost by a branch to its head office is not subject to the 15% profits remittance tax since production cost is not considered profit, the same being a mere return of capital which is not considered income. In view thereof, and considering that the amounts to be paid under the Memorandum of Agreement between COL-Branch and COL-Head Office represent mere reimbursement of cost, said payments, therefore, are not subject to the withholding tax nor to the branch profit remittance tax both imposed under Revenue Regulations No. 2-98, as amended. cAHIaE 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service