Bank's Income Not Arising from Banking Operations Not Subject to Branch Profit Remittance Tax if Remitted Abroad

December 8, 1986 BIR RULING NO. 268-86 25 (a) (5) 220 000-00 268-86 Gentlemen : This refers to your letter dated September 18, 1986 requesting opinion as to whether the compensation income received by your client, HongKong and Shanghai Banking Corporation (HSBC) from Ortigas and Company, Ltd. is subject to the 5% gross receipts tax and the 15% profit remittance tax under Sections 220 and 25(a)(5) of the Tax Code, as amended by Executive Order No. 37. It is represented that Ortigas and Co. Ltd. (hereinafter referred to as Ortigas and Co.) is a limited partnership engaged in real estate business; that the head office of your client, HSBC in HongKong granted a loan to Ortigas & Co., before the war which was later converted into an equity (investment) in Ortigas & Co.; that the local branch manager of HSBC, on behalf of the head office acts as one of the managing partners of Ortigas and Co., Ltd. for which it receives compensation income; and that said compensation income is remitted by HSBC (local branch) to its head office in HongKong. In reply, please be informed that Section 220 of the Tax Code, as amended imposes a tax on gross receipts derived from sources within the Philippines by all banks and non-bank financial intermediaries from interest, commissions, discounts from lending activities of property, real or personal, profits from exchange and all other items treated as gross income under Section 29 of the Tax Code. Gross income, under Section 29 of the Tax Code, as amended by Executive Order No. 37 means all income from whatever source derived including (but not limited to) the following items: (1) compensation for services, including fees, commissions, and similar items; (2) gross income derived from business; (3) gains derived from dealings in property; (4) interest; (5) rents; (6) royalties; (7) dividends; (8) partner's distributive share of the gross income of general professional partnership. It is to be noted that gross income means all income derived from whatever source. Accordingly, the compensation income received by the local branch of HSBC under the foregoing facts is subject to the 5% gross receipts tax prescribed under Section 220 of the Tax Code, as amended. Under the Section 25(a)(5) of the Tax Code, as amended by Executive Order No. 37, only profits remitted abroad by a branch office to its head office which are effectively connected with the conduct of its trade or business in the Philippines are subject to the 15% branch profits remittance tax. Considering, that such income does not arise from banking operations, the business activity in which HSBC is engaged, said income if remitted abroad are not considered branch profit; hence, the same are not subject to the 15% branch profit remittance tax imposed by Section 25(a)(5) of the Tax Code, as amended by Executive Order No. 37. cdtech Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner of Internal Revenue