Considering that Hongkong Shanghai Hotels, Ltd.'s Principal Business is the Management of Hotels, their Ratable Share in Its Head Office Overhead Expenses may be Determined on the Basis of the Ratio of Number of Hotel Rooms Managed in the Philippines to Total Rooms of All the Hotels Managed Worldwide

February 24, 1995 BIR RULING NO. 045-95 36 (b) 000-00 045-95 Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati, Metro Manila Attention: Atty . C . P . Noel Gentlemen : This refers to your letter dated August 9, 1994 requesting in behalf of your client, The Hongkong and Shanghai Hotels, Ltd. Philippine Branch (HKSH-Phil.), for a ruling confirming your opinion that as a resident foreign corporation, HKSH-Phils. is entitled to deduct for tax purposes its ratable share in head Office overhead expenses pursuant to Section 36(b) of the Tax Code in relation to Section 160 of Revenue Regulations No. 2, as amended by Revenue Regulations No. 16-86, and your opinion that HKSH-Phils. is authorized to adopt a method of allocation based on the ratio of number of rooms managed in the Philippines to total rooms managed worldwide for purposes of computing the allocable head office expenses. It is represented that HKSH-Phils. is the Philippine branch of the Hongkong and Shanghai Hotels, Ltd., a foreign corporation domiciled in Hongkong; that the principal business of Hongkong and Shanghai Hotels, Ltd. is the management of hotels; that in the Philippines, HKSH Phils. handles the management of the Peninsula Hotel Manila; that in computing the ratable share of the head office expenses, the Hongkong and Shanghai Hotels, Ltd. has used the ratio of local rooms managed in the Philippines to the total rooms managed worldwide; and that the said method of allocation is not among the specific ratios mentioned in Revenue Regulations No. 16-86. In reply, please be informed that under Section 36(b) [then Section 37(b)] of the Tax Code as implemented by Section 160 of Revenue Regulations No. 2, as amended by Revenue Regulations No. 16-86, a resident foreign corporation is allowed to deduct from its gross income derived from sources within the Philippines, the expenses directly and clearly related to the production of Philippine-derived income or to Philippine operations (e.g. salaries of Philippine personnel, rental of office building in the Philippines), without resorting to apportionment. However, the overhead expenses incurred by the parent company in connection with the finance, administration, and research and development, all of which directly benefit its branches all over the world, including the Philippines, fall under a different category. These are items which cannot be definitely allocated or identified with the operations of the Philippine branch. Under said Section 36(b) [then Sec. 37(b)] of the Tax Code as implemented by Section 160 of Revenue Regulations No. 2, as amended, the local branch can claim as its deductible share a ratable part of such expenses based upon the ratio of the local branch's gross income to the total gross income, worldwide, of the multinational corporation or patent corporation. (Smith Kline & French Overseas vs. Commissioner of Internal Revenue, G.R. No. 54108, January 17, 1984) Moreover, aside from the ratio of Philippine gross income to worldwide gross income, or Philippine net sales to worldwide net sales, any other method of allocation of ratable share in head office overhead expenses can be adopted, provided that a written permission from the Commissioner of Internal Revenue is secured and the ratio adopted is consistently followed from year to year. In view thereof, and considering that Hongkong Shanghai Hotels, Ltd.'s principal business is the management of hotels, your client's ratable share in its head office overhead expenses may be determined on the basis of the ratio of number of hotel rooms managed in the Philippines to total rooms of all the hotels managed worldwide. This will confirm and serve as your authority to adopt the ratio of number of hotel rooms managed in the Philippines to total hotel rooms managed worldwide for the purpose of computing the allocable head office expenses provided that the said method should be consistently followed from year to year. cdtech Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue