BIR Ruling [DA-536-04]

October 29, 2004 BIR RULING [DA-536-04] 32 (B) (7) (a); DA-004-04 SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Ms. Ma. Victoria A. Villaluz Gentlemen : This refers to your letter dated October 27, 2003 requesting in behalf of your client, SCAD Services (S) PTE., LTD. Philippine Branch (SCAD Phils.) for a confirmation of your opinion that there will be no imputation of interest income on the advances made by the head office to its Philippine branch. It is represented that SCAD Phils. is a Philippine branch of SCAD Services (S) PTE., LTD. (SCAD Singapore), a corporation organized and existing under the laws of Singapore; that SCAD-Phils. was registered as a branch office of a foreign corporation with the Philippine Securities and Exchange Commission (SEC) on October 4, 1995; that it is also registered with the Philippine Economic Zone Authority (PEZA) as an ecozone export enterprise; that SCAD-Phils. had been granted a pioneer status with PEZA and is entitled to six (6) years income tax holiday; that it has a pending application for additional one (1) year extension using labor to capital ratio; that SCAD-Phils. is engaged in the business of manufacturing, assembling, importing, exporting, buying and selling on wholesale basis all kinds of construction and/or housing materials such as doors, window frames, picture frames, moldings, shelf, wall, cabinets, closets, sash, stairs, handrails, picture assembly, kitchen assembly, closet assembly, chimney assembly and other wooden and non-wooden parts and assemblies; that on several occasions, SCAD-Phils. made requests for cash advances from its head office in Singapore to pay for pre-operating expenses; that SCAD-Singapore remits the cash advances to its branch office through its bank account in Citibank; that the advances from SCAD-Singapore were used by SCAD-Phils. as working capital and to pay for the acquisition of machinery and equipment necessary for the operation; that as of December 2002, SCAD-Phils, has accumulated advances from SCAD-Singapore in the amount of P1,317,056,970.00. In reply, please be informed that in BIR Ruling No. DA-004-04 dated January 6, 2004 citing BIR Ruling No. 199-99A dated December 3, 1999, it was ruled that: ". . . inter-corporate advances are not covered by Revenue Memorandum Order (RMO) No. 63-99 dated July 19, 1999. Section 2.3 of the RMO states that it does not apply to indebtedness which was in fact a contribution to capital. The foregoing inter-corporate advances are analogous to capital contribution since it is based on percentage of stockholdings of the stockholders making the advances. The fact that some individual stockholders in some instances are not able to contribute to the fund consisting the advances does not destroy its character as an analogous capital contribution. In other instances where the advances are made due to financial need of borrowing company and the financial ability of the lending company, it is clear that these are emergency loans to help a related company which is short of capital. These are not the instances covered by Section 4.1 of the RMO which would authorize the Commissioner of Internal Revenue to allocate interest income under Section 50 of the Tax Code 1997 because such inter-corporate loans are clearly transactions, done for tax avoidance or evasion purposes." The above ruling clearly applies in the instant case considering that the capitalization requirements for the operations of the branch is funded by advances made by the Head Office since they are, anyway, one and the same entity. DEScaT Accordingly, the advances made by SCAD-Singapore to SCAD-Phils are in the nature of capital contributions and therefore not covered by RMO No. 63-99 and consequently not subject to the imputed interest under the aforesaid RMO. As such, any income received by SCAD-Singapore from the said advances to SCAD-Phils are not subject to income tax and consequently to withholding tax. Finally, it is therefore safe to conclude that SCAD-Phils is not required to withhold the tax on interest income otherwise due on the interest earned by SCAD-Singapore on their advances to SCAD-Phils. 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group