BIR Ruling No. 197-82

June 17, 1982 BIR RULING NO. 197-82 37-b 000-73 197-82 A.M. Sison, Jr. & Associates 6th Floor, Rufino Bldg. 6784 Ayala Avenue, Makati Metro Manila Attention: Mr . Antero M . Sison, Jr . Gentlemen : This refers to your letter dated March 11, 1982, requesting for and in behalf of your client, SINGER SEWING MACHINE COMPANY, Philippine Branch, a ruling on the following queries: "(1) Is the Head Office expense allocated to the Philippine Branch in 1980, amounting to P16,990,539, a deductible expense of the Philippine Branch for income tax purposes? "(2) Is the conversion into foreign investment, in the form of additional assigned capital, of a portion of said allocated expense amounting to P14,173,905 subject to any withholding tax?" It is represented that Singer Sewing Machine Company is a U.S. corporation doing business in the Philippines through a branch office; that in 1980 certain Head Office expenses which could not be identified to any particular country of operation were allocated; that the said expenses are: (1) International Division Headquarters Expenses U.S. $15,149,463; (2) Sewing Products Group Headquarters, Expenses Allocated to International Division U.S. $14,210,645; and (3) World Headquarters, Expenses Allocated to International Division U.S. $15,236,239; that the share allocated to the Philippine Branch in the amount of P16,990,539 was computed based on ratio which Philippine Branch Sales of U.S. $32,578,000 bears to International Divisions Sales of U.S. $643,463,000; and that instead of remitting to the Head Office in the United States the said allocated expenses, your client wishes to convert the same into additional capital investment of the Head Office in the Philippine Branch. aisadc In reply thereto, I have the honor to inform you that expenditures made by a foreign corporation in conducting its business are deductible in computing its taxable income from sources within the Philippines only when allocable to the production of income from sources within the Philippines or where a ratable part of the general expenditures is apportioned to income from sources within the Philippines. The net income of a resident foreign corporation, is therefore determined by deducting from the items of gross income specified in Section 37(a) of the National Internal Revenue Code treated as income from sources within the Philippines, the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any other expenses, losses, or deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, is included in full as net income from sources within the Philippines. The ratable part is based upon the ratio of gross income from sources within the Philippines to the total gross income. (Sec. 37(b), NIRC; Sec. 160 Rev. Regs. No. 2) It appears that the amount of P16,990,539 was computed based on the ratio which the Philippine Branch Sales of U.S. $32,578,000 bears to International Division Sales of U.S. $643,463,000. Such being the case, and since the amount of P16,990,539 represents the ratable part of the expenses allocated to the Philippine branch, the same is deductible for income tax purposes by the Philippine branch. The conversion of a portion of the aforesaid allocated expenses amounting to P14,173,905 into foreign investment in the form of additional assigned capital is not subject to withholding tax since the same is a mere reimbursement of expense and is not considered income of the Head Office of your client. The above ruling is based on your representation and the same will be revoked if, after investigation, it is ascertained that the facts are different from those represented. Very truly yours, RUBEN B. ANCHETA Acting Commissioner