PHILIPPINES Law and Practice Contributed by: Carina Laforteza, Joanna Marie Joson, Kristina Paola Frias and Joanna Marie Reyes, SyCip Salazar Hernandez & Gatmaitan
Tax Code as a corporation not created or organised in the Philippines or under its laws. Local branches of non-local corporations are taxed differently from local subsidiaries of such non-local corporations. Local branches of non-local corpora - tions are subject to income tax only on their Philippine- sourced income, while local subsidiaries of non-local corporations are considered domestic corporations and subject to income tax on their worldwide income. With respect to their taxable income (Philippine- sourced or worldwide, as applicable), local branches and local subsidiaries of non-local corporations are subject to the same tax rates: • 25% corporate income tax based on taxable income; or • 2% MCIT based on gross income. Regional operating headquarters of non-local corpo - rations are now subject to RCIT. However, the local branch’s remittance of branch prof - its to the foreign head office is subject to branch profit remittance tax of 15%, while remittance of dividends by the local subsidiary to the foreign head office is subject to FWT of 25%, subject to the tax sparing credit and tax treaty. 5.3 Capital Gains of Non-Residents Net capital gains from the sale of stock in local cor - porations are always subject to Philippine income tax, except if there is an applicable tax treaty that grants CGT exemption. Net capital gains of non-resident individuals and non- resident foreign corporations arising from the sale of stock in local corporations not traded on the local stock exchange are subject to CGT of 15%. The gain from the sale of shares of a non-local hold - ing company will be considered income from sources outside the Philippines and will not be subject to Phil - ippine income tax unless the seller is a resident Philip - pine citizen or a domestic corporation.
Treaties eliminate CGT under certain conditions. For instance, there are tax treaties that exempt the net capital gains arising from the sale of shares in a local corporation from CGT if the assets of the local corpo - ration do not consist principally of real property. 5.4 Tax Implications of Change of Control In general, there is no change of control provision that by itself would trigger tax and duty charges unless the change in control arises from the disposition of shares in a domestic corporation. However, change of control may affect the deductibility of certain expenses, such as NOLCO, which is deductible from gross income only if there has been no substantial change in the ownership of a business or enterprise. 5.5 Formula-Based Income Attribution The BIR’s Revenue Audit Memorandum Order No. 1-95, which contains the audit guidelines and proce - dures for the proper determination of the income tax liability of Philippine branches and liaison offices of multinational enterprises selling goods or providing services, prescribes a formula whereby a portion of the income derived from Philippine sources by the foreign entity is attributed and taxed to the branch or liaison office. 5.6 Deductibility of Intra-Group Management and Administrative Charges There is no specific standard applied in allowing a deduction for payments by local affiliates for manage - ment and administrative expenses incurred by a non- local affiliate. As a rule, an expense may be allowed as a deduction from the gross income of the local affili - ate if the same is an ordinary and necessary expense paid or incurred during the taxable year in carrying on, or that is directly attributable to, the development, management, operation and/or conduct of the trade or business of the local affiliate. The transfer pricing guidelines issued by the BIR also require that the pay - ment should be consistent with the arm’s length prin - ciple. In the case of payment to a non-local affiliate, the payor must withhold any applicable withholding taxes and remit the same to the BIR. 5.7 Restraints on Related-Party Borrowing In addition to the usual requirements of deductibility of interest expense, the interest agreed upon by and
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