Imposition of 15% branch profit remittance tax

A registered Philippine branch of a foreign corporation was assessed for deficiency taxes on its failure to withhold the 15% branch profit remittance tax (BPRT) on its alleged indirect profit remittance under Section 28(A)(5) of the Tax Code. The BIR alleged that based on the branch’s audited financial statement, which showed the composition of its home office account, there is disclosed a net income in the head office account that partakes of the nature of indirect remittances to the head office.

In assessing the branch for BPRT, the BIR relied on its previous ruling (BIR Ruling No. 039-2005), which held that an increase in the head office’s assigned capital to its Philippine branch by transferring net profits of the branch to the assigned capital account should be subject to BPRT, despite the fact that the profit from operation will not be physically remitted to the head office abroad.

The CTA held that although the audited financial statement of the branch revealed a net income, it did not show that it was transferred or had become part of the assigned capital. The CTA agreed with the explanation made by the branch that in line with branch accounting principles of the Philippines, the home office account in the audited financial statement is comprised of different items (i.e., assigned capital, transactions with head office and accumulated income). As gleaned from the audited financial statement, the net income is separate from the assigned capital. Thus, although the net income is included in the home office account, it did not result in an increase in assigned capital account.

Considering that no transfer of the net income to the assigned capital had taken place, the CTA maintained that the ruling invoked by the BIR cannot apply to the case because the scenario (i.e., increase in the head office assigned capital to the Philippine branch by transferring net profits of the branch to the assigned capital account) is not present in the case.

The CTA also found no evidence that the branch remitted, earmarked or applied for remittance of its net income. The CTA further held that the BPRT may not be imposed just because there is income. Section 28(A)(5) of the Tax Code speaks of “any profit remitted,” which pertains to that portion of the branch profits sent to the head office as distinguished from the total net income or profits of the branch. Thus, for the provision of the law to apply, there must be a remittance of the branch profits by the branch to the head office; the mere existence of an income does not in any way justify the imposition of the BPRT.

(Commissioner of Internal Revenue v. United Parcel Service Co., CTA EB No. 721 re CTA Case No. 7667, May 16, 2012)

Tax Brief – June 2012

Punongbayan and Araullo