Modifying BIR Ruling No. 028-86

September 23, 1987 BIR RULING NO. 302-87 25-a 000-00 302-87 Gentlemen : This refers to your letter dated January 26, 1987 requesting reconsideration of BIR Ruling No. 24-b-000-00-028-86 dated April 1, 1986 to the effect that Saudia Arabian Airlines Corporation (Saudia) as an on-line airline engaging in business in the Philippines, is considered a resident foreign corporation subject to the 2 % tax on its gross Philippine billings pursuant to then Section 24 (b)(2)(i) of the Tax Code; that Saudia is not entitled to tax exemption under P.D. No. 218 because for engaging in airline business in the Philippines it is deriving taxable income from Philippine source; and that being a branch, Saudia is subject to the 15% profit remittance tax on "any profit remitted abroad" to its head office pursuant to Section 24 (b)(2)(ii) of the Tax Code. In your request, you stated that Saudia is represented by its general sales agent, Travel Wide Associated Sales Phils., Inc., which handles the sales of its tickets. In reply, I have the honor to inform you that in the case of Commissioner vs. British Overseas Airways Corporation and the Court of Tax Appeals, G.R. No. 65773-74, April 30, 1987, it appears that BOAC, an off-line international airline maintained a general sales agent in the Philippines, which was responsible for selling BOAC tickets covering passengers and cargoes. In said case, the Supreme Court ruled that BOAC was engaged in business in the Philippines through a local agent during the period covered by the assessments involved therein, and that BOAC is a resident foreign corporation subject to income tax. In the light of said ruling, Saudia, an online international airline, is engaging in business and is, therefore, a resident foreign corporation. [Sec. 20(h), Tax Code] Moreover, the fact that Saudia pays the 3% common carrier's tax prescribed by Section 173 of the Tax Code, which is a tax on business is an admission that Saudia is engaging in the airline business in the Philippines. However, with respect to Saudia's liability to the 15% branch profit remittance tax, this office, upon further study of the matter, has finally decided that it is not liable for the payment of said tax liability. It will be noted that under Section 15 of Revenue Regulations No. 2, as amended by Revenue Regulations No. 8-75, pertinent portion of which reads as follows: "SEC. 15. Income Tax on Corporations . (a) (1) On domestic corporation . The law imposes an annual income tax upon the taxable net income received during each taxable year from all sources by every domestic corporation and partnership, no matter how created or organized, but not including general professional partnership. xxx xxx xxx "(b) Tax on resident foreign corporation . The law imposes the tax provided in subsection (a) of this section upon the total net income derived in the preceding taxable year from all sources within the Philippines by a corporation organized, authorized, or existing under the laws of a foreign country, engaged in trade or business within the Philippines, except the following: "(1) International carriers shall pay a tax of 2 % of their 'gross Philippine billings.' "Other items of gross income enumerated in Section 39 of those regulations shall subject to tax prescribed in subsection (a) of this Section. "(2) Profit remitted abroad by a branch office to its mother company shall be subject to 20% tax, except those registered with Export Processing Zone Authority. The herein tax is in addition to the regular tax imposed under subsection (a) of this section . For the purpose of this subsection, any form of remittance, direct or indirect, made to the mother company abroad shall be presumed to have been made from the accumulated profits of the branch." (emphasis supplied) the 20% (now 15%) branch profit remittance tax is in addition to the regular corporate income tax due from resident foreign corporations . This regular corporate income tax which is equivalent to 35% of the taxable income is now prescribed by Section 25 (a)(1) of the Tax Code, as amended by Executive Order No. 37. On the other hand, the 2 % income tax on gross Philippine billings which is due from international carriers is provided by Section 25(a)(2) of the Tax Code as amended by Executive Order No. 37. Accordingly, it becomes obvious that the branch profit remittance tax prescribed by Section 25(a) (5) of the same Code is imposed only on resident foreign corporations subject to the regular corporate income tax and not to international carriers which are subject to the 2 % tax on gross Philippine billings. Moreover, the same conclusion can be drawn from the reason behind the imposition of the branch profit remittance tax which appears in the following statement of then Commissioner Efren I. Plana as quoted in Nolledo's 1983 Edition of the National Internal Revenue Code, Annotated, pages 78-79: "On reduction of branch profits remittance, Commissioner Plana said: 'Before, Philippine branches of foreign corporations were subject only to the normal corporate income tax of 25%-35%. The remittance of profit realized by the branch from Philippine sources was not subject to income tax. On the other hand, Philippine subsidiaries of non-resident foreign corporations are subject to the corporate income tax on their net taxable income and their dividend declaration to the parent company is subject to a withholding tax. Taxwise, there used to be a decided advantage in favor of local branches of foreign corporations because they were liable to only one layer of income taxation, that is, when income is realized in the Philippines. On the other hand, the net income of a domestic subsidiary of a foreign corporation is subject to two layers of taxation: (1) when the income realized by the local subsidiary and (2) when the income is declared as dividends by the local subsidiary to its parent company abroad. In order to neutralize the tax situation as between a local branch of a foreign corporation and a domestic subsidiary of another foreign corporation, the 20% branch profit remittance tax was imposed . However, it was realized that under certain conditions, the dividend remittance by a local subsidiary to its foreign parent corporation is subject to withholding tax of 15% as against the 20% branch profit remittance tax. This partially negates the attempt to place a branch and subsidiary on the same footing. It was therefore deemed necessary to reduce the branch profit tax from 20% to 15%." (Emphasis supplied) Accordingly, BIR Ruling No. 028-86 is hereby modified insofar as it holds Saudia liable for the payment of the 15% branch profit remittance tax. Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner