BIR Ruling [DA-731-06]

December 18, 2006 BIR RULING [DA-731-06] 28 (A) (5); DA-536-04 Taisei Corporation Philippine Branch 23rd Floor, Equitable Bank Tower Makati City Attention: Mr. Yasuyuki Watanabe Resident Agent and Project Administration Manager Gentlemen : This refers to your letter dated November 8, 2006 stating that Taisei Corporation (Taisei), is a Japanese construction firm incorporated under the laws of Japan and is also registered with the Philippine Securities and Exchange Commission and authorized to do business in the Philippines as a Philippine Branch, either alone or in joint venture with other construction firms for the construction of government infrastructure projects under the "Build-Operate-Transfer" schemes, foreign funded projects such as those funded by the Japan Bank for International Cooperation (JBIC) and other foreign government-funded projects. At present, Taisei, in joint venture with other Japanese construction firms was awarded contracts for the implementation of the New Iloilo Airport Development Project (still on going) under the Department of Transportation and Communications (DOTC), Clark-Tarlac Expressway Project-Package 2 (still on going) under the Bases Conversion and Development Authority (BCDA), Cebu South Coastal Road Project (completed January 23, 2006) under the Department of Public Works and Highways (DPWH), and the West of Mangahan Flood Control Project-Package (completed April 10, 2004). All of the above-mentioned projects are partially funded by JBIC while the balance or the difference is funded by the Government of the Republic of the Philippines through the concerned executing government agencies. As an operating branch of a foreign company, Taisei will initially receive Yen advances from its Head Office-Tokyo, Japan and convert it into Peso to pay for the purchase of local materials, labor and other operating cost and expenses in the implementation of each specific project. In addition to Yen advances, certain imported materials and construction equipment are also being purchased/imported from other countries, including Japan, and paid for by the Tokyo Head Office. These advances are partially settled through the direct Yen settlement/remittances by JBIC against Taisei's monthly progress billings which usually accounts for 60% to 70% of its collections. Full settlement should come from the Peso Portion but the concerned government executing agency is always delayed in its payments due to lack of funds or delay in the remittances of their fiscal budgets. This results in corresponding delays and under-settlement of its advances to its Head Office. Due to late payments of the Peso Portion, Taisei expects that at the end of every project, a large amount of peso deposits will remain at its Philippine bank accounts. Taisei intends to convert some of these peso deposits to Yen and make remittances to Japan to liquidate the advances extended to it by its Tokyo Head Office. However, these remittances might be construed as remittances of branch profit which is subject to 15.0 % tax in accordance Sec. 28, par. (5) of the 1997 Tax Code. 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 15.0% Branch Profit Tax. In this regard, you are requesting confirmation that the above-mentioned liquidation of advances to your Tokyo Head Office is not subject to 15% Branch Profit Remittance Tax. Likewise, you would like confirmation that the following procedures and documentations will be sufficient to support these transactions and to prove that the liquidation is not a remittance of profit but reimbursement or repayment of advances: 1. Detailed Statement of Account or Billing Statement supported by: a. For Imported Materials and Supplies: Certified true copies of Invoices and other shipping documents b. For Yen Advances remitted to the Philippines: Certified true copies of local bank Credit Advices for Yen inward remittances. 2. Local Bank Debit Advice for outward remittance/repayment of the advances. In reply, please be informed that Section 28(A)(5) of the Tax Code of 1997, provides that: "(5) Tax on Branch Profits 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% branch profit remittance tax is imposed on profits remitted abroad by a branch to its head office. "The tax base upon which the 15% branch profit remittance tax 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 Yen advances by your Head Office in Tokyo, Japan is used to pay for the purchase of local materials, labor and other operating cost and expenses of your branch operations in the implementation of each specific project, as well as for the payment of certain imported materials and construction equipment for the same projects, it is clear that liquidation of the said advances would not constitute profits taxable under the above provision of law. The advances made by your Head Office in Tokyo, Japan are in the nature of temporary capital contributions and therefore are not subject to income tax and withholding tax and consequently to branch profit remittance tax. (BIR Ruling No. 049-86 dated April 23, 1986; BIR Ruling No. 268-86 dated December 8, 1986; BIR Ruling DA-536-04 dated October 29, 2004). TEAaDC However, it is necessary for you to adequately provide supporting documents to prove the veracity of such advances, among which should include: 1. Information return or statement certified by a responsible official of your company showing details of imported materials and supplies paid for directly in Yen by your Head Office, inclusive dates, project names, and duly supported by original or certified true copies of relevant shipping documents; 2. Information return or statement certified by a responsible official of your company showing details of Yen Advances remitted directly by your Head Office to your Branch, inclusive dates, and duly supported by original or certified true copies of local bank Credit Advices for Yen inward remittances. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service