Siguion Reyna Montecillo & Ongsiako Law Offices

October 30, 2009 BIR RULING [DA-(OSL-035) 640-09] 28 (A) (5); RR 2-98; #161-98; DA-495-06; DA-090-01; DA-010-06; DA-006-02 Siguion Reyna Montecillo & Ongsiako Law Offices 4th & 6th Floors, Citibank Center, 8741 Paseo de Roxas Makati City Attention: Attys. Jose Lis C. Leagogo and Ma. Corazon Del Castillo Gentlemen : This refers to your letter dated October 15, 2009 requesting on behalf of your client, Sutherland Global Services Philippines, Inc. (Philippine Branch Office) ("SGSPI-Phil. Branch") for confirmation of your opinion that: TCEaDI 1. The branch profit remittances made by SGSPI-Phil. Branch to Sutherland Global Services Philippines Inc. (SGSPI) are not subject to the 15% branch profits remittance tax (BPRT) to the extent of the income earned in relation to its activities that are registered with the Philippine Economic Zone Authority (PEZA) both under the income tax holiday (ITH) and 5% tax on gross income regimes; 2. The branch profit remittances made by SGSPI-Phil. Branch to Sutherland Global Services Philippines Inc. (SGSPI) are not subject to the 15% branch profit remittance tax (BPRT) to the extent of the income earned in relation to its services that are registered with the Clark Development Corporation (CDC); and 3. The branch profit remittances of SGSPI-Phil. Branch to SGSPI on the profits earned in relation to the profits earned by SGSPI-Phil. Branch from non-PEZA and non-CDC registered activities are subject to 15% BPRT. Background SGSPI is a corporation duly organized and existing under the laws of the Cayman Island British West Indies and has a branch office in the Philippines. SGSPI-Phil. Branch is registered with the PEZA as an Ecozone IT (Export) Enterprise. Its registered activities include: 1. Process consulting services, account management services, technical support/help desk, customer care services and back-office processing at the ExportBank Plaza Building; 2. Process consulting, back-office processing, technology support, and customer relationship management project at the Camarines Sur Information Technology Park; 3. Process consulting, back-office processing, technology support, and customer relationship project at the Tarlac Provincial Information Technology Park II; 4. Process consulting services, account management services, technical support/help desk, customer care services and back-office processing at the Luisa Avenue Square IT Center; 5. Process consulting services, account management services, technical support/help desk, customer care services and back-office processing at the Total Corporate Center (transferred from 31st floor, ExportBank Plaza Building); and 6. Process consulting, back-office processing, technology support, and customer relationship management project at the Burgundy Corporate Tower. TSHcIa SGSPI-Phil. Branch is also registered with the CDC as a Clark Freeport (CFZ) enterprise committed to engage in process consulting, technology support services, account management services, technical support/help desk services, customer care services and back office processing for operating call center. We reply, as follows: 1. SGSPI-Phil. Branch's remittances from profit derived from PEZA-registered activities "SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporations. (5) Tax on Branch Profits Remittances. Any profit remitted by a branch to its head office shall be subject to a tax of fifteen (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." (Emphasis supplied.) In relation to Section 28 (A) (5) of the Tax Code, as amended, Section 2.57.1 (H) (2) of Revenue Regulations (RR) No. 2-98 provides: "SECTION 2.57.1. Income Payments Subject to Final Withholding Tax. The following forms of income shall be subject to final withholding tax at the rates herein specified; xxx xxx xxx Tax on Branch Profit Remittances On any profit remitted by the Philippine branch of a foreign corporation to its head office abroad based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof except those registered with the Philippine Economic Zones Authority (PEZA) and other companies within the special economic zones such as Subic Bay Metropolitan Authority (SBMA) and Clark Development Authority (CDA) Fifteen percent (15%)." (Emphasis supplied) Applying the above cited provisions of the Tax Code and RR No. 2-98, as amended, this Office held in BIR Ruling No. DA-495-06 dated August 11, 2006 that the remittance of branch profits from the Philippine branch is not subject to the 15% BPRT since the profits from which the remittance came were derived from PEZA-registered activities. Thus: "Pursuant to Section 28(A)(5) of the Tax Code of 1997, as amended, any profit remitted by a branch to its head office is subject to a 15% branch profits remittance tax except profits earned from those activities which are registered with the Philippine Economic Zone Authority. xxx xxx xxx Such being the case, the remittance of branch profits from the Philippine branch to Texas is not subject to branch profits remittance tax under Section 28(A)(5) of the Tax Code of 1997, as amended, since the profits in its books for the years 1979 to 2001 or from the time of its PEZA registration until the transfer of its PEZA registration to TI (Phils.) Inc. arose from its business activities registered with PEZA. Furthermore, the remittance of these branch profits by the Philippine branch to Texas will be done to wind up its PEZA registered business in preparation for its legal closure." (Emphasis supplied.) TAScID Therefore, the branch profit remittances by SGSPI-Phil. Branch to SPSPI are not subject to 15% BPRT to the extent of the profits earned from its PEZA-registered activities, under both the ITH and 5% tax on gross income regimes. On the other hand, the branch profits remittances to SPSPI on the profits earned from its non-PEZA registered activities, if any, shall be subject to 15% BPRT. 2. SGSPI-Phil. Branch's remittances from profits derived from CDA-registered activities Section 2 of Republic Act (RA) No. 9400, amending RA No. 7227 or the Bases Conversion and Development Act of 1992, provides: "SEC. 2. Section 15 of Republic Act No. 7227, as amended, is hereby amended to read as follows: "The provisions of existing laws, rules and regulations to the contrary notwithstanding, no national and local taxes shall be imposed on registered business enterprises within the CFZ. In lieu of said taxes, a five percent (5%) tax on gross income earned shall be paid by all registered business enterprises within the CFZ and shall be directly remitted as follows: three percent (3%) to the National Government, and two percent (2%) to the treasurer's office of the municipality or city where they are located. " Duly registered business enterprises that will operate in the Special Economic Zones to be created shall be entitled to the same tax and duty incentives as provided for under Republic Act No. 7916, as amended: Provided, That for the purpose of administering these incentives, the PEZA shall register, regulate, and supervise all registered enterprises within the Special Economic Zones." (Emphasis supplied.) In BIR Ruling No. 161-98 dated November 18, 1998, this Office held that Philippine branches registered with the Subic Bay Metropolitan Authority (SBMA) as Subic Bay Freeport (SBF) enterprises are subject to 5% tax on gross income in lieu of any and all other taxes, including the 15% BPRT. Thus: "In reply, please be informed that if as represented, the proposed Philippine branches of BSL and BIL which are both SBF enterprises will provide or render management and construction services, respectively within the SSEFZ, said branches of BSL and BIL are only subject to 5% final tax on their respective gross income earned in lieu of any and all other taxes. Accordingly, the same shall be exempt from any other national and local taxes, including but limited to 35% (now 34%) corporate income tax and 15% branch profit remittance tax, pursuant to Section 43 of the implementing rules and regulations of Republic Act No. 7227, otherwise known as the "Bases Conversion and Development Act of 1992". (Emphasis supplied.) The above ruling is consistent with BIR Ruling No. 006-02 dated January 29, 2002, wherein it was held: "In reply, please be informed that pursuant to Section 12(c) of R.A. No. 7227, SBF registered enterprises shall be exempt from all national and local taxes in lieu of paying the preferential tax of five percent (5%) of the gross income earned. Section 3(o) of Revenue Regulations No. 1-95, as amended by Revenue Regulations No. 12-97 provides that "gross income" refers to gross sales or gross revenues derived from the registered business activity within the ECOZONE, net of sales discounts, sales returns and allowances and minus cost of sales, cost of production or direct costs of services but before any deduction for selling and administrative expenses or incidental losses during a given taxable period." cSATDC While the afore-cited rulings pertains to SBMA-registered enterprises, it is also applicable to CDC-registered enterprises since both are covered by R.A. No. 7227, as amended by R.A. No. 9400. However, the branch profit remittances of SGSPI-Phil. Branch to SGSPI on the profits earned in relation to the profits earned by SGSPI-Phil. Branch from non-PEZA and non-CDC registered activities are subject to 15% BPRT. 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