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BDB Law’s “Tax Law for Business” appears in the opinion section of Business Mirror everyThursday.

Doing business through a branch

FOREIGN businesses may establish their presence in the Philippines through various forms.Like local business, the more common mode of business organization used by foreignowners is through the registration of a domestic corporation. The choice of which form,however, can be influenced by many factors, such as the foreign ownership issue, liabilityconcerns, requirements for setting-up, taxation and other business considerations.

An alternative to forming a domestic corporation is through a branch office. Althoughlicensed to do business in the Philippines, a branch office of a foreign corporation is not adomestic corporation. It is an extension of the foreign head office and does not acquire aseparate juridical personality. Thus, its liabilities also extend to the head office.

For capitalization purposes, this does not differ from a domestic corporation. As a rule, aPhilippine branch requires a minimum assigned capital of the equivalent $200,000 fordomestic market enterprise. And export enterprise can have a minimum capital of P5,000.

One requirement peculiar to a branch though is the security deposit mandated under Section126 of the Corporation Code of the Philippines. Recently, the Securities and ExchangeCommission (SEC) issued Memorandum Circular 2, Series of 2012, stating the policy behindthis requirement and the guidelines to be followed—to provide reasonable assurance thatbranch offices of a foreign corporation duly licensed to do business in the Philippines shallbe able to settle their obligations incurred within the Philippines, and to ensure theircompliance with investment requirements.

This new circular provides a more detailed outline of this requirement. Branches of foreigncorporations, except representative offices, regional or area headquarters, regionaloperating headquarters, insurance and banking corporations, are mandated to depositsecurities with an actual market value of at least P100,000 with the commission within 60days after the issuance of the SEC license.

Additional securities shall be deposited within six months after the end of the fiscal yearindicated in the Financial Statements (FS) in the following situations:

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i. If the licensee’s gross income within the Philippines for that fiscal year exceedsP5,000,000 additional securities with an actual market value equivalent to 2 percent of theincrease in said gross income; and

ii. If the actual market value of the securities deposited has decreased by at least 10 percentfrom the time it was deposited, additional securities with an actual market value that wouldcover the decrease.

For taxation purposes, there is no significant difference between the tax rates imposed on adomestic corporation with that of a branch of a foreign corporation. But a branch of a foreigncorporation is allowed to claim as deductible expenses a portion of the expenses incurred bythe head office. Usually, the amount or extent of the allocated expenses is the cause ofdispute between the branch and the tax authorities. The rules of the BIR are so strict thatsometimes the allocated head office expenses are disallowed.

Interestingly, in defining gross income for purposes of determining the security deposit, SECMemorandum Circular 2, Series of 2012, allowed the following direct costs and expensesincurred with foreign affiliates and related parties as deductions from gross income:

a. costs of sales incurred with foreign suppliers;

b. direct costs of services attributable to related party transactions outside the Philippines;

c. direct cost incurred attributable to foreign non-related party supplier;

d. depreciation and amortization of tangible and intangible assets used directly for itsmanufacturing operations can be deducted from gross income provided the followingconditions are met:

i. these expenses form part of the foreign corporation’s direct asset costs and costs of sales;

ii. these expenses relate to assets that were imported or purchased from foreign vendors;

iii. these expenses relate to assets that had been paid in full by the foreign corporation; and

iv. these expenses relate to assets that are subject to any mortgage, lien or encumbrance.

e. Other foreign related direct cost and expense items.

I wonder if the BIR would allow the same types of costs and expenses in computing thetaxable income of the branch of foreign corporation.

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The author is a junior associate of Du-Baladad and Associates Law Offices (BDB Law), amember-firm of World Tax Services (WTS) Alliance.

The article is for general information only and is not intended, nor should be construed as asubstitute for tax, legal or financial advice on any specific matter. Applicability of this articleto any actual or particular tax or legal issue should be supported therefore by a professionalstudy or advice. If you have any comments or questions concerning the article, you may e-mail the author at eveart.pomarin@bdblaw.com.ph or call 403-2001 local 311.