Method of Computing the Net Income from Sources Within the Philippines

August 12, 1959 BIR RULING NO. 374-59 Messrs. Ponce Enrile, Siguion Reyna, Montecillo and Belo Seventh Floor, Soriano Building M a n i l a Gentlemen : Reference is made to your letter dated July 31, 1959, requesting ruling as to the method of computing the net income from sources within the Philippines of your client, the Compania General de Tabacos de Filipinas, a foreign sociedad anonima doing business in the Philippines, in connection with its filing of its income tax return for the year 1958, particularly with respect to its business involving the production, sale and exportation of tobacco, sugar, etc. You are requesting this ruling allegedly to avoid lengthy discussions with the examiners and investigators of this Office which your client had experienced in the past as to the proper formulas authorized by the law and regulations for the determination of your client's net income. In reply thereto, I have the honor to quote hereunder the self-explanatory provisions of section 162 of Regulations No. 2, the Income Tax Regulations: "SEC. 162. Income from the sale of personal property derived from sources partly within and partly without the Philippines . Items of gross income not allocated by sections 152 to 159 or 161 of these regulations to sources from within or without the Philippines shall (unless unmistakably from a source within or a source without the Philippines) be treated as derived from sources partly within and partly without the Philippines. "The portion of such income derived from sources partly within the Philippines and partly within a foreign country which is attributable to sources within the Philippines shall be determined according to the following rules and cases: " Personal property produced and sold . Gross income derived from the sale of personal property produced (in whole or in part) by the taxpayer within the Philippines and sold within a foreign country, or produced (in whole or in part) by the taxpayer within a foreign country and sold within the Philippines shall be treated as derived partly from sources within a foreign country under one of the cases named below. As used herein the word 'produced' includes created, fabricated, manufactured, extracted, processed, cured, or aged. "CASE 1. Where the manufacturer or producer regularly sells part of his output to wholly independent distributors or other selling concerns in such a way as to establish fairly an independent factory or production price or shows to the satisfaction of the Collector of Internal Revenue that such an independent factory or production price has been otherwise established unaffected by considerations of tax liability, and the selling or distributing branch or department of the business is located in a different country from that in which the factory is located or the production carried on, the net income attributable to sources within the Philippines shall be computed by an accounting which treats the products as sold by the factory or productive department of the business to the distributing or selling department at the independent factory price so established. In all such cases the basis of the accounting shall be fully explained in a statement attached to the return. "CASE 2. Where an independent factory or production price has not been established as provided under case 1, the net income shall first be computed by deducting from the gross income derived from the sale of personal property produced (in whole or in part) by the taxpayer within the Philippines and sold within a foreign country or produced (in whole or in part) by the taxpayer within a foreign country and sold within the Philippines, the expenses, losses, or other deductions property apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which can not definitely be allocated to some item or class of gross income. Of the amount of net income determined, one-half shall be apportioned in accordance with the value of the taxpayer's property within the Philippines and within the foreign country, the portion attributable to sources within the Philippines being determined by multiplying such one-half by a fraction the numerator of which consists of the value of the taxpayer's property within the Philippines, and the denominator of which consists of the value of the taxpayer's property both within the Philippines and within the foreign country. The remaining one-half of such net income shall be apportioned in accordance with the gross sales of the taxpayer within the Philippines and within the foreign country, the portion attributable to sources within the Philippines being determined by multiplying such one-half by a fraction the numerator of which consists of the taxpayer's gross sales for the taxable year or period within the Philippines, and the denominator of which consists of the taxpayer's gross sales for the taxable year or period both within the Philippines and within the foreign country. The gross sales of the taxpayer within the Philippines' means the gross sales made during the taxable year which were principally secured, negotiated, or effected by employees, agents, offices, or branches of the taxpayer's business resident or located in the Philippines. The term 'gross sales' as used in this paragraph refers only to the sales of personal property produced (in whole or in part) by the taxpayer within the Philippines and sold within a foreign country or produced (in whole or in part) by the taxpayer within a foreign country and sold within the Philippines, and the term 'property' includes only the property held or used to produced income which is derived from such sales. Such property should be taken at its actual value, which in the case of property valued or appraised for purposes of inventory, depreciation, depletion, or other purposes of taxation shall be the highest amount at which so valued or appraised, and which in other cases shall be deemed to be its book value in the absence of affirmative evidence showing such value to be greater or less than the actual value. The average value during the taxable year or period shall be employed. The average value of property as above prescribed at the beginning and end of the taxable year or period ordinarily may be used, unless by reason of material changes during the taxable year or period such average does not fairly represent the average for such year or period, in which event the average shall be determined upon a monthly or daily basis. Bills and accounts receivable shall (unless satisfactory reason for a different treatment is shown) be assigned or allocated to the Philippines when the debtor resides in the Philippines. "CASE 3. Application for permission to base the return upon the taxpayer's books of account will be considered by the Collector of Internal Revenue in the case of any taxpayer who, in good faith and unaffected by considerations of tax liability, regularly employs in his books of account a detailed allocation of receipts and expenditures which reflects more clearly than the processes or formulas herein prescribed, the income derived from sources within the Philippines." Accordingly, in determining its net income for the year 1958 and in succeeding years, your client should be guided strictly by the provisions of the abovequoted section 162 of the Income Tax Regulations. In this connection, please be informed that Case No. 2 mentioned in the aforequoted Section 162 of Revenue Regulations No. 2 applies only in cases where "an independent factory or production price has not been established" and a "selling or distributing branch or department of the business is located in a different country from that in which the factory is located or the production carried on." Consequently, the profits from sugar, tobacco and other products directly exported to bona fide buyers are wholly subject to Philippine income tax. Very truly yours, (SGD.) MELECIO R. DOMINGO Commissioner of Internal Revenue