BIR Ruling [DA-546-04]

November 5, 2004 BIR RULING [DA-546-04] 28 (A) (5); S-34-434-96; DA-128-04 Tax Counseling Integrated Unit 2204-C, PSE Centre Tower I Exchange Road, Ortigas Center Pasig City Attention: Atty. Reynoso B. Floreza Tax Counsel Gentlemen : This refers to your letter dated April 21, 2004 requesting for and on behalf of your client, Bechtel Overseas Corporation (BOC), for a ruling on whether BOC is still liable to pay surcharge, interest and compromise penalty due to late payment of Branch Profit Remittance Tax (BPRT). It is represented that on June 16, 2003, the branch office of BOC in the Philippines remitted to the US based Mother Company its profits derived from business operations. On July 7, 2003, a representative from BOC went to the collection unit of the Large Taxpayers Service (LTS) to pay the corresponding 15% Branch Profit Remittance Tax (BPRT) by presenting the BIR-issued Tax Credit Certificate (TCC). Unexpectedly then, the said representative was informed that the TCC cannot be accepted as payment because the BPRT is a withholding tax under Section 57(A) of the Tax Code. Moreover, the representative was told that like the earlier tender of payment with TCC of fringe benefit tax liability of BOC, the mode of payment cannot be accepted because BPRT is a withholding tax and, therefore, is not the direct liability of BOC for which reason the TCC cannot be accepted as valid payment. BOC, through its counsel, immediately requested the BIR to convert the TCC to cash so that the amount of P27,697,652.28 representing BPRT could be paid. Unfortunately, the BIR did not have funds enough for the conversion of the same, hence the payment of the BPRT was voluntarily made (without any assessment) only on April 20, 2004. In reply, please be informed that under Section 28(A)(5) of the Tax Code of 1997, the profits remitted by the branch to its head office is subject to the payment of 15% BPRT. Accordingly, the tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of the Code. In relation with the requirement of Section 204 of the same Code that the TCC could not be used for the payment of withholding taxes that are not considered direct liability of the taxpayer, the issue that confronts Us now is whether the branch profit remittance tax is a direct liability of the branch office or of the Head Office. HCTAEc In the case of Bank of America NT & SA vs. Court of Appeals , 234 SCRA 302 , the Supreme Court said: "The remittance tax was conceived in an attempt to equalize the income tax burden on foreign corporations maintaining, on the one hand, local branch offices and organizing, on the other hand, subsidiary domestic corporations where at least a majority of all the latter's shares of stock are owned by such foreign corporations. Prior to the amendatory provisions of the Revenue Code, local branches were made to pay the usual corporate income tax of 25%35% on net income (now a uniform 35%) applicable to resident foreign corporations (foreign corporations doing business in the Philippines). While Philippine subsidiaries of foreign corporations were subject to the same rate of 25%35% (now also a uniform 35%) on their net income, dividend payments, however, were additionally subjected to a 15% (withholding) tax (reduced conditionally from 35%). In order to avert what would otherwise appear to be unequal tax treatment on such subsidiaries vis--vis local branch offices, a 20%, later reduced to 15%, profit remittance tax was imposed on local branches on their remittances of profits abroad. But this is where the tax paripassu ends between domestic branches and subsidiaries of foreign corporations . The Solicitor General suggests that the analogy should extend to the ordinary application of the withholding tax system and so with the rule on constructive remittance concept as well. It is difficult to accept the proposition. In the operation of the withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed, while the payor, a separate entity, acts no more than an agent of the government for the collection of the tax in order to ensure its payment. Obviously, the amount thereby used to settle the tax liability is deemed sourced from the proceeds constitutive of the tax base. Since the payee, not the payor, is the real taxpayer, the rule on constructive remittance (or receipt) can be easily rationalized, if not indeed, clearly manifest. It is hardly the case, however, in the imposition of the 15% remittance tax where there is but one taxpayer using its own domestic funds in the payment of the tax. To say that there is constructive remittance even of such funds would be stretching far too much that imaginary rule. Sound logic does not defy but must concede to facts ." At this juncture, it can be viewed that there are two persons involved in the withholding tax system: the withholding agent (payor) and the taxpayer (payee). The latter is deemed to be the party directly liable to the tax withheld by the former which is eventually remitted to the BIR. Consequently, the TCC of the payor/withholding agent cannot be used in payment for the same because it is not its direct liability. However, in the case at bar, the distinction between the taxpayer and the party named as the withholding agent does not exist because the branch and its head office possess a single legal personality. (See Philipp Brothers Oceanic, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 3140, March 8, 1984 ) In addition, it is only the manner of collecting and paying the BPRT that are provided for under the provisions of Sections 57 and 58 of the Code, without, however, making the branch as the withholding agent , as contemplated under Section 204. The incontrovertible fact of this case is that the branch tendered the TCC as payment of the BPRT, which is a local fund derived from the construction business operations handled by the branch in the conduct and management of the BOC's trade or business in the Philippines. As represented, the profits were remitted on June 16, 2003 and the BPRT should have been paid not later than July 26, 2003 under Section 58 of the same Code. As early as July 7, 2003, BOC has tendered the TCC but was rejected which led to the filing of a formal protest in the Law Division. Ordinarily, BOC may be considered to be delinquent, but due to twin reasons hereunder cited, this Office believes that BOC is not liable to pay the additional increments for late payment. (See Cagayan Electric Power & Light Co., Inc. vs. Commissioner of Internal Revenue (138 SCRA 629) as cited in BIR Ruling No. DA-128-04 dated March 24, 2004) . It may be recalled that BOC voluntarily paid the liability without the benefit of audit and in the absence of the decision on the protest filed in the Law Division. The late payment which happened on April 20, 2004 was not due to any willful failure of the branch to pay the tax, but solely attributable to the erroneous rejection of the TCC payment and the inability of the BIR to encash the TCC for the purpose of paying the BPRT in cash. When a disputable issue has been raised in a protest, there could be no imposition of increments till after an adverse resolution of the issue has been made. The prescriptive period for assessment or collection of the tax is deemed suspended before the BIR issuance of the ruling in the protest. ( See BIR Ruling No. S-34-434-96 dated November 21, 1996 ) In view of all the foregoing, this Office has decided to sustain the position of BOC that it is not liable for the payment of increments (surcharge, interest and compromise) 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. THEcAS Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group