STUDY GUIDE FOR TAXATION SEC 27,28, AND 34 OF NIRC

Sec 27((4)(d) Intercorporate Dividends. - Dividends received by a resident foreign corporation from a domestic corporation liable to tax under this Code shall not be subject to tax under this Title. Intercorporate dividends A final withholding tax at the rate of fifteen percent !"#$ is hereby imposed on the amount of cash and%or property dividends received by a non-resident foreign corporation from a domestic corporation& subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the 'hilippines e(uivalent to thirty two percent )*#$ in the year *+++. This is the so-called tax sparing rule.

Tax sparing rule , Involves intercorporate dividends received by a non-resident foreign corporation from a domestic corporation -nly !"# final withholding tax on cash and%or property dividends is imposed 'rovided the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the 'hilippines& which is )*# by *+++ ./ec. *0& 1$ "$ b$2

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TAX BENEFIT RULE ! if a taxpayer recovers an amount that was deducted or credited against tax in a previous year& the recovery must be included in income to the extent that the deduction or credit reduced the tax liability in the earlier year. If no tax benefit was derived from a prioryear deduction or credit& the recovery does not have to be included in income. 2! if a taxpayer repays an amount that was previously included in taxable income& the repayment can be deducted in the year in which it is repaid. BRAN"# $R%FIT RE&&ITAN"E TAX /3C.*0 "$ Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head office shall be subject to a tax of fifteen !"#$ which shall be based on the total profits applied or earmar4ed for remittance without any deduction for the tax component thereof except those activities which are registered with the 'hilippine 3conomic 5one Authority$. The tax shall be collected and paid in the same manner as provided in /ections "6 and "0 of this Code7 provided& that interests& dividends& rents& royalties& including remuneration for technical services& salaries& wages premiums& annuities& emoluments or other fixed or determinable annual& periodic or casual gains& profits& income and capital gains received by a foreign corporation during

each taxable year from all sources within the 'hilippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the 'hilippines.

Dictionary meaning7 Ta' Sparin( - where the full amount of the taxes reduced or exempted by the source country is credited. Ta' ar)itra(e* Trading that ta4es advantage of a difference in tax rates or tax systems as the basis for profit.

Article/ Discussion about tax arbitrage: x Interest expense limitation and tax arbitrage by Olivier D. Aznar At these times of economic downturn, it is not surprising to observe that debts in huge amounts are being sourced by corporate taxpayers which are in dire need of funds. And corollary to the acquisition of debts is the cost of such debt the interest expense. Consequently, taxpayers having material amount of interest expense recorded in their books are at a look out to know the extent of deductible amount of interest expense for income tax computation purposes. Under ection !" #$% of the &''( )ax Code, as amended, the amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer*s profession, trade or business is allowed as deduction from gross income. +owever, the taxpayer*s otherwise allowable deduction for interest expense should be reduced by !!, of the interest income sub-ected to final tax. )his is the rule on interest expense limitation. $ased on the above provision, the amount of interest expense equivalent to !!, of interest income sub-ected to final tax will be non.deductible, and only the remaining portion of the interest expense can be claimed as expense in the income tax computation. )his limitation on the deductibility of interest expense was legislated specifically to address the tax arbitrage arising from the difference between the /0, final tax on interest income and the regular corporate income tax rate #1C2)% under which interest expense can be claimed as a deduction. )he rate of interest limitation is actually the difference between the 1C2) and the /0, final tax as a percentage of the 1C2) rate, rounded off. )hat is, 1C2) rate less /0,, divided by the 1C2) rate. +ence, under the then !/, 1C2), the limitation is equal to #!/,./0,% 3 !/, 4 !(.5,6 under the !5, 1C2), #!5,./0,% 3 !5, 4 "/.78,6 and under the !0, 1C2), #!0,./0,% 3 !0, 4 !!.!!,. )ax arbitrage could be explained by a simplified illustration, as follows9 :n ;anuary &, /00', Corporation < borrowed from a local bank an amount of =500,000 at a &0, annual interest #resulting to interest expense%. 2mmediately thereafter, the proceeds of the loan were placed in a local bank deposit account which earns a &0, annual interest rate #resulting to interest income%. Assuming that the rule on interest expense limitation is not yet in place, the interest expense of =50,000 #&0, of =500,000% will result to a tax benefit of !0, or =&5,000 in /00'6 while the interest income of =50,000 #&0, of =500,000%, being a passive income will only be sub-ected to final tax of /0, or =&0,000. )he taxpayer would derive a net benefit of =5,000 from the combined effect of a lower rate of final tax liability and a higher rate of tax deductibility. 1eali>ing the negative impact of tax arbitrage on revenue generation, the interest expense limitation was legislated.

1evenue 1egulations #11% ?o. &!.00, the regulations issued to implement the interest expense limitation, specifically provides that the limitation shall apply regardless of whether or not a tax arbitrage scheme was entered into by the taxpayer for as long as, during the taxable year, there is an interest expense incurred on one side and an interest income earned on the other side, which interest income had been sub-ected to final withholding tax. )his rule has also been reiterated in various rulings issued by the $21 including $21 1uling ?o. 008. /000. 2n this ruling, a bank.taxpayer sought for the exclusion of the interest income from its treasury bonds received from the ?ational @overnment in payment of the latter*s liability to the bank.taxpayer from the application of the interest expense limitation. )he bank.taxpayer argued that it did not enter into a tax arbitrage scheme. )he $21 held that the limitation shall apply regardless of whether or not a tax arbitrage scheme was entered into by the taxpayer. ubsequently, however, the $21 issued o ther rulings that are not consistent with the above pronouncements. 2n $21 1uling ?o. AA.07!.08 and $21 1uling ?o. AA.!&5./00", the bank.taxpayers sought exemption from the limitation citing that their interest income that were sub-ected to the /0, final tax were derived from cash deposit that are required to be maintained with the $ = and3or other financial institutions pursuant to $anking 1egulations. 2n these rulings, the $21 held that the absence of intent to undertake tax arbitrage scheme negates the application of the interest limitation rule. )o address these conflicting rulings, the $21 issued 1evenue Bemorandum Circular #1BC% !&.0' where it held that the law is very clear and leaves no room for interpretation. 2f a taxpayer incurred indebtedness and interest expense connected with his trade or business during the taxable year and also earned interest income which had been sub-ected to final withholding tax, the amount of interest expense shall be sub-ect to the limitation as provided for by law. 2t was stressed that the law did not require that there be a tax arbitrage in order that the limitation on the deduction of the interest expense can be applied. 11 ?o. &!.00 itself specifically provides that the limitation shall apply regardless of whether or not a tax arbitrage scheme was entered into by the taxpayer. )he 1BC further declares that the interpretation under $21 1uling ?o. 008./000 shall prevail over all other rulings issued not in consonance therewith.

http://www.punongbayan-araullo.com/pnawebsite/pnahome.nsf/section_docs/LR !"#_$-%-&'

What is tax arbitrage? In the context of cro !"or#er f$n%nce, the ter& %r"$tr%'e $ ( e# to #e cr$"e the ex)*o$t%t$on "+ &(*t$n%t$on%* 'ro() of % +&&etr$e "et,een #$fferent t%x re'$&e -t%x re'$&e #o not %*,%+ &%tch e%ch other e.(%**+/, to %ch$e0e % re#(ct$on $n the o0er%** *e0e* of t%x )%+%"*e "+ the 'ro()1 For ex%&)*e, t%x re'$&e #$ffer $n ho, the+ #ef$ne #e"t %n# e.($t+1 Th$ )re ent o))ort(n$t$e to the %#e)t t%x )*%nner ,ho ,$** t+)$c%**+ ee2 % t%x #e#(ct$on for $ntere t )%+%"*e $n % '$0en 3(r$ #$ct$on %n# %rr%n'e for the corre )on#$n' rece$)t to %r$ e $n % 3(r$ #$ct$on ,here $t ,$** "e t%xe# % o&eth$n' other th%n $ntere t -)erh%) % % #$0$#en# or c%)$t%* )rocee# / or not t%xe# %t %** -)erh%) "ec%( e $t $ een % %n $ntr%! ent$t+ )%+&ent/1 Ex%&$n%t$on of the re*e0%nt #o("*e t%x%t$on %'ree&ent ho(*# ho, ,hether %n+ &$ &%tch $ *e'$t$&%te or not1

It $ $&)ort%nt to tre th%t %r"$tr%'e t%2e &%n+ for& 1 It &%+ "e % $&)*e &$ &%tch $n ter& of ho, % )%rt$c(*%r tr%n %ct$on $ ch%r%cter$ e# $n the )%rt$e 4 re )ect$0e t%x 3(r$ #$ct$on 1 Or $t &$'ht $n0o*0e #$ffer$n' )er )ect$0e on the ch%r%cter$ t$c -e1'1 re $#ence t%t( / or $#ent$t+ of the )ro)er )er on to "e t%xe# or to ,ho& re*$ef %re #(e -other cor)or%te *%, re'$&e )ro#(ce ent$t$e th%t ,e f$n# #$ff$c(*t to reco'n$ e/1 An#, 3( t % %r"$tr%'e $t e*f c%n t%2e &%n+ for& , o the t%x %#0%nt%'e o('ht &%+ "e #$fferent fro& c% e to c% e1 If % )%rt$c(*%r che&e $ (cce f(* % t%x )*%nner &%+ (ccee# $n5 o"t%$n$n' % #e#(ct$on for $ntere t -or other ex)en e / ,here the corre )on#$n' rece$)t ,$** not "e t%xe#, or ,$** effect$0e*+ not "e t%xe# "ec%( e of the %0%$*%"$*$t+ of re*$ef -DTR for ex%&)*e/ o"t%$n$n' % #o("*e #e#(ct$on for ex)en e , &o t co&&on*+ $ntere t, $n #$fferent 3(r$ #$ct$on c*%$&$n' *o re*$ef t,$ce $n #$fferent 3(r$ #$ct$on 1

S)ec$f$c %nt$!%r"$tr%'e r(*e , %))*+$n' to "oth #e#(ct$on %n# rece$)t , ,ere $ntro#(ce# ,$th effect fro& 67 8%rch 299: to co(nter (ch contr$0e# %rr%n'e&ent to %0o$# U; t%x, %n# th$ *e'$ *%t$on $ %t F2A9:<S24!36 %n# F2A9:<SC=31 Other )ec$f$c %nt$!%r"$tr%'e r(*e %re r%re, "(t $nc*(#e the >e.($t+ note> *e'$ *%t$on %t CTA69<S696: %n# the 'ro() re*$ef re tr$ct$on for #(%* re $#ent co&)%n$e %t CTA69<S69?1 Ar"$tr%'e tr%n %ct$on th%t #o not offen# the 'ener%* or )ec$f$c r(*e of the 3(r$ #$ct$on $n0o*0e# "e'$n to )o e )ro"*e& ,hen the c%*e of the %r"$tr%'e -n(&"er of tr%n %ct$on %n# %&o(nt $n0o*0e#/ thre%ten to cre%te econo&$c #$ tort$on 1 It $ c*e%r*+ (n#e $r%"*e for 'ro() to "e (n#(*+ $nf*(ence# to,%r# "% $n' $n0e t&ent #ec$ $on not )(re*+ on co&&erc$%* con $#er%t$on "(t %* o on the %0%$*%"$*$t+ of t%x %r"$tr%'e o))ort(n$t$e 1

http://www.hmrc.go(.u)/manuals/intmanual/intm*'!* &.htm

Discussion about tax benefit rule:

2n =erry v. United tates, &80 C. upp. /(0 #Ct. Cl. &'57%, the Court of Claims adopted an Dexact tax benefitD rule, under which the recovery was taxed at the rate that was applicable to the deduction6 it later overruled this decision and accepted the prevailing -udicial view that the recovery is to be taxed at whatever rate is in effect for the year of receipt. Alice =helan ullivan Corp. v. United tates, !7& C./d !'' Ct. Cl. &'8(%. Crom &'5" to &'(8, 2.1.C. E &!"/ reached a similar result for certain recoveries of amounts paid as a result of a -udicial decision in a patent infringement suit. ection &!"8 #in force from &'"& to &'(8% was

also comparable to the Dexact tax benefitDprinciple of the =erry case6 it permitted taxpayers receiving a repayment of unconstitutional federal taxes to choose between #a% excluding the receipt currently andamending the earlier yearFs return to eliminate the deduction #despite the running of the statute of limitations% and #b% reporting the recovery and paying the resulting tax. ections &!"/ and &!"8 were repealed by )itle <2< #the DdeadwoodD provisions% of the )ax 1eform Act of &'(8, =ub. G. ?o. '"."55, E &'0&#a%#&"(%.#&"7%, '0 tat. &(77 #&'(8%. A model income tax statute drafted by an American Gaw 2nstitute group proposed to require the inclusion of all recoveries of deductible items, whether the deduction was taken or not, and, if a deduction was taken, whether or not it resulted in a reduction of the taxpayerFs tax, sub-ect, however, to the taxpayerFs option to reopen the earlier year if the statute of limitations had not expired or if the amount exceeded specified dollar or percentage limits.

http://www.batasnatin.com/law-library/taxation-law/income-taxation/+&, -exact-tax-benefit-rule-perry-(sus.html

discussions about branch profit remittance tax http://www.ustci(illaw.com/-urisprudence/ ''!/gr_ &,&'+_ ''!.php http://www.lawphil.net/.ud.uris/.uri '$"/.un '$"/gr_"""*,_ '$".html http://alaminoslawblog.blogspot.com/+& +/&'/imposition-of- *-branch-profit.html

codals: http://www.chanrobles.com/legal"nationalinternalre(enuecodeof ''%.html/.012&3hix4f5