Register a Branch Office in the Philippines

Shall a Branch, being a Resident Foreign Corp., be subjected to income tax from sources within and outside the Philippines?

MM&CO.: Per Section 28 (A) of the Tax Code, the same shall be subject to an income tax only from all sources within the Philippines.

How about Value Added Tax, shall it also be subjected to VAT only on income inside the Philippines?

MM&CO.: We confirm.  As held in several rulings of the BIR, the Philippine VAT Law adheres to the “cross border doctrine” of the VAT system, which basically means that no VAT shall be imposed to form part of the cost of goods destined for consumption outside the territorial border of the Philippine taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT. Conversely, those goods destined for use or consumption and services to be rendered within the Philippines shall be subject to the 12% VAT.

Can a Branch now be registered with PEZA (located in a PEZA bldg.) as long as 70% of its sales are export sales?  Comment:   If this is true, then an RFC can avoid putting up a USD200k capital and at the same time be registered with PEZA to enjoy Income Tax Holidays.

MM&CO.: We confirm.  Moreover, another important incentive is the exemption on tax on branch profit remittances.  Under Section 28(A)(5), NIRC of 1997, it expressly provides that:

“(5) Tax on Branch Profits Remittances. — Any profit remitted by a branch to its head office shall be subject to a tax of fifteen percent (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority).” [Emphasis and underscoring ours]

Question on ROHQ registration:

The ROHQ is required to initially remit into the country within 30 days from receipt of the Certificate of Registration with SEC through BOI such amount as may be necessary to cover its operations in the

Philippines but which amount will not be less than US$200,000 or its equivalent in other currencies.  This should be evidenced by a Certificate of Inward Remittance issued by the depository branch.

MM&CO.: We confirm as per Section 17 of SEC MC No. 15, Series of 2006.

ROHQs are subject to 10% income tax on taxable net income instead of the 30%/25% on income.

MM&CO.: We confirm as per Section 28(A)(6)(b) of the 1997 Tax Code, as amended.

Being resident, 30% Income Tax applies within the Philippines only?

MM&CO.:  We are of the view that the same is subject to 10% and not 30%. Under Chapter 4, Art. 64 of Republic Act No. 8756 dated November 23, 1999, Regional operating headquarters shall be subject to a tax rate of ten percent (10%) of their taxable income as provided for under the National Internal Revenue Code, as amended by Republic Act No. 8424:  Provided, That any income derived from Philippine sources by the ROHQ when remitted to the parent company shall be subject to the tax on branch profit remittances as provided for in Section 28(a)(5) of the National Internal Revenue Code.

Are ROHQs really subjected to 12% Vat on transactions earned in the Philippines?

MM&CO.: Yes. To reiterate our answer above, as held in several rulings of the BIR, the Philippine VAT Law adheres to the “cross border doctrine” of the VAT system, which basically means that no VAT shall be imposed to form part of the cost of goods destined for consumption outside the territorial border of the Philippine taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT. Conversely, those goods destined for use or consumption and services to be rendered within the Philippines shall be subject to the 12% VAT.

It is allowed to derive income from its activities in the Philippines and conduct business in the same manner as its head office.

On the other hand, if it seeks to be an export-oriented enterprise that exports goods and services amounting to 60% or more of its gross sales, it is exempted from paying the minimum paid-up capital requirement of US$200,000.00 and can be registered with as little as PHP5,000.00.

Registration Requirements for a Branch Office in the Philippines

Foreign corporations intending to set up a branch office in the Philippines are only allowed to commence their business operations after obtaining a License to Do Business in the Philippines from the Securities and Exchange Commission (SEC). To secure a License to Do Business, a foreign corporation needs to provide the following documentary requirements:

• SEC Application Form No. F-103 – Application of a Foreign Corporation to Establish a Branch Office in the Philippines;
• Name verification slip;
• Certified copy of the Board of Resolution of the parent company authorizing the establishment of the branch office and designating a Resident Agent to receive summons and legal proceedings (can be a Philippine resident or a domestic corporation); in the absence of such agent or upon cessation of its operations in the Philippines, any summons or legal proceedings may be served to the SEC as if the same is made upon the corporation at its head office;
• Latest audited financial statements of the parent company certified by an independent certified public accountant (CPA) and authenticated by the Philippine consulate/embassy;
• Certified copies of the Articles of Incorporation of the parent company;
• Certificate of Inward Remittance and Certificate of Bank Deposit of US$200,000.00 or US$100,000.00 as initial capitalization;
• Endorsement or clearance from appropriate government agencies (if applicable); and
• Resident Agent acceptance of appointment (if agent is not the signatory of the application form).

Corporate Taxing

As an income-generating business entity, a Philippine branch office is subject to 30% income tax and 12% value-added tax (VAT) on its local sales. It is also subject to withholding taxes on the compensation it provides for its employees in the Philippines, and can be passed on 12% VAT on its purchases from VAT-registered suppliers.

Profits remitted by a branch office to the parent company – those that are directly connected with its business in the Philippines – are subject to the branch profit remittance tax of 15%, unless a reduction of this rate is provided in applicable tax treaties. Under Philippine tax treaties with certain countries such as the Netherlands, Japan, Germany, and Austria, a preferential tax of 10% on branch profit remittances is granted. However, if the branch office is located in one of the special economic zones of the Philippine Economic Zone Authority (PEZA), it is exempted from paying the tax on branch profit remittances.

Subject to certain conditions, overhead expenses of the head office may be allocated to the branch office in the Philippines.