Hazama Corporation Philippine Branch

October 16, 2007 BIR RULING [DA-536-07] 28 (A) (5); DA-536-04; DA-731-06 Hazama Corporation Philippine Branch Unit 304 SEDCCO I Building 120 Rada St., Legaspi Village Makati City Attention: Mr. Shinji Sukegawa Admin & Finance Manager Gentlemen : This refers to your letter dated September 28, 2007 stating that Hazama Corporation is a Japanese construction company incorporated under the laws of Japan; that it is also registered with the Philippine Securities and Exchange Commission (SEC) and is authorized to do business in the Philippines; that at present, Hazama Corporation, Philippine Branch ("Hazama") is engaged in the construction of the Subic-Clark-Tarlac Expressway (SCTEx) Project which is covered by the Exchange of Notes between the Philippine Government and the Japanese Government; that initially, Hazama received Yen and/or US dollar as advances from its Tokyo Head Office and convert it into peso, in order to finance the construction cost and its operating expenses exclusively for SCTEx Project; that the foregoing scheme was adopted due to the delay in the payment by the concerned government executing agency, the Bases Conversion and Development Authority (BCDA), resulting from lack of funds or delay in the remittances of its fiscal budgets; that as a result, Hazama expects that at the completion of the project, a large amount of its bank deposits, regardless of the currency, will remain at its Philippine bank accounts; that Hazama intends to remit back to Japan the said remaining amount to liquidate the advances from its Tokyo Head Office; that these remittances might be construed as remittances of branch profit which is subject to 15% tax in accordance Section 28 (A) (5) of the Tax Code of 1997, as amended; and that since said remittances are just payments of the advances or liabilities due to its head office, and not remittance of the profits, it is your opinion that the same should not be subject to the 15% Branch Profit Remittance Tax (BPRT). In this regard, you are requesting confirmation that the abovementioned liquidation of advances to the Tokyo Head Office by Hazama is not subject to the 15% BPRT. Likewise, you would like to be advised of the procedures and documentations to support the above transaction of Hazama and to prove that the liquidation it made is not a remittance of profit but reimbursement or repayment of its advances. In reply, please be informed that Section 28 (A) (5) of the Tax Code of 1997, as amended, provides as follows: CEASaT "(5) Tax on Branch Profit 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 all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines." As a rule, the 15% BPRT is imposed on profits remitted abroad by a branch to its head office. The tax base upon which the 15% BPRT is imposed is the profit actually remitted abroad. ( Commissioner of Internal Revenue vs. Burroughs Limited , G.R. No. 66653, June 19, 1986, 142 SCRA 324.) Since Hazama's yen and/or US dollar advances from its head office in Tokyo, Japan is used to pay for the construction and/or operating cost and expenses of its branch operations in the implementation of the SCTEx Project, it is clear that liquidation of the said advances would not constitute profits taxable under the above provision of law. The advances made by the head office in Tokyo, Japan are in the nature temporary capital contributions and therefore are not subject to income tax and withholding tax and consequently to the BPRT. (BIR Ruling No. 049-86 dated April 23, 1986; BIR Ruling No. 268-86 dated December 8, 1996; BIR Ruling DA-536-04 dated October 29, 2004) However, it is necessary for Hazama to adequately provide supporting documents to prove the veracity of such advances. Thus, Hazama is required to submit information return or statement certified by a responsible official of its company showing details of the Yen and/or US dollar advances remitted directly by the Head Office to Hazama, the inclusive dates, and duly supported by original or certified true copies of local bank Credit Advices for Yen and/or US dollar inward remittances. 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. HcSaAD Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service