BDB Laws Tax Law for Business appears in the opinion section of Business Mirror every

Thursday.

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 foreign
owners 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, liability
concerns, requirements for setting-up, taxation and other business considerations.
An alternative to forming a domestic corporation is through a branch office. Although
licensed to do business in the Philippines, a branch office of a foreign corporation is not a
domestic corporation. It is an extension of the foreign head office and does not acquire a
separate 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, a
Philippine branch requires a minimum assigned capital of the equivalent $200,000 for
domestic 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 Section
126 of the Corporation Code of the Philippines. Recently, the Securities and Exchange
Commission (SEC) issued Memorandum Circular 2, Series of 2012, stating the policy behind
this requirement and the guidelines to be followedto provide reasonable assurance that
branch offices of a foreign corporation duly licensed to do business in the Philippines shall
be able to settle their obligations incurred within the Philippines, and to ensure their
compliance with investment requirements.
This new circular provides a more detailed outline of this requirement. Branches of foreign
corporations, except representative offices, regional or area headquarters, regional
operating headquarters, insurance and banking corporations, are mandated to deposit
securities with an actual market value of at least P100,000 with the commission within 60
days after the issuance of the SEC license.
Additional securities shall be deposited within six months after the end of the fiscal year
indicated in the Financial Statements (FS) in the following situations:

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i. If the licensees gross income within the Philippines for that fiscal year exceeds
P5,000,000 additional securities with an actual market value equivalent to 2 percent of the
increase in said gross income; and
ii. If the actual market value of the securities deposited has decreased by at least 10 percent
from the time it was deposited, additional securities with an actual market value that would
cover the decrease.
For taxation purposes, there is no significant difference between the tax rates imposed on a
domestic corporation with that of a branch of a foreign corporation. But a branch of a foreign
corporation is allowed to claim as deductible expenses a portion of the expenses incurred by
the head office. Usually, the amount or extent of the allocated expenses is the cause of
dispute between the branch and the tax authorities. The rules of the BIR are so strict that
sometimes the allocated head office expenses are disallowed.
Interestingly, in defining gross income for purposes of determining the security deposit, SEC
Memorandum Circular 2, Series of 2012, allowed the following direct costs and expenses
incurred 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 its
manufacturing operations can be deducted from gross income provided the following
conditions are met:
i. these expenses form part of the foreign corporations 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 the
taxable income of the branch of foreign corporation.
****
The author is a junior associate of Du-Baladad and Associates Law Offices (BDB Law), a
member-firm of World Tax Services (WTS) Alliance.
The article is for general information only and is not intended, nor should be construed as a
substitute for tax, legal or financial advice on any specific matter. Applicability of this article
to any actual or particular tax or legal issue should be supported therefore by a professional
study or advice. If you have any comments or questions concerning the article, you may email the author at eveart.pomarin@bdblaw.com.ph or call 403-2001 local 311.

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