Tax Treatment of Certain Remittance

July 22, 1971 BIR RULING NO. 014-71 Tax treatment of certain remittance . It appears that the X Register of Shipping (hereinafter referred to as the society) is an unincorporated foreign classification society organized and existing under the laws of England; that the main purpose for which it was formed is the establishment of construction and maintenance standards for ships, and the provision of a technical service to help ship owners to maintain those standards; that the society has a local office in Manila licensed to engage in the survey and classification of shipping and to undertake marine inspection in the Philippines; that the sources of income of the Manila Office come from fees charged for the services of its surveyors; that ships and machinery survey work undertaken by the Manila Office by virtue of the nature of ship classification, involves also work by the technical staff in the London headquarters of the society; that this work by the London headquarters is paid for from the fees earned in Manila; and that the Manila Office gets approximately 60% of the total survey fee income while 40% thereof goes to the society for the work of classification and administration undertaken by its London headquarters. cdt Resolution of the question presented hinges on the determination of the following, viz: 1. Whether or not the amount remitted by the Manila Office to the Society, consisting of 40% of the total remuneration for survey work undertaken by the former with technical advice, instruction and administration of the latter, is subject to Philippine income tax; and 2. Whether or not the said remittances are deductible from the gross income of the Manila Office. Before resolving any of the issues involved in this case, it is but proper to determine, once and for all, the status of the Society for purposes of Philippine income tax law. Although under the law of its organization (England) the Society is treated as an unincorporated association, however, under the Philippine income tax law, particularly Section 84(b) of the Tax Code, the Society comes within the meaning of the term "corporation". Since the Society has an office in Manila and is authorized to engage in business in the Philippines, it is considered a resident foreign corporation taxable on its net income from sources within the Philippines, pursuant to Section 24(b) (2) of the Tax Code, as amended. It is admitted that the fees in question are fees charged by the Manila Office for services of its surveyors and that the said fees are earned in Manila. It is therefore clear that the fees in question are income from sources within the Philippines, including the 40% share therein of the Society. In other words, the remittances to the Society representing 40% share in the fees, form part of the gross income of the Manila Office and consequently, subject to Philippine income tax. The aforementioned remittances to the Society, representing its 40% share in the fees earned in Manila are not deductible from the gross income of the Manila Office, said remittances not being necessary expenses paid or incurred in carrying on the business conducted within the Philippines exclusively. (See Section 30(a) (3), Tax Code) cd