PHILIPPINES Law and Practice Contributed by: Carina Laforteza, Joanna Marie Joson, Kristina Paola Frias and Joanna Marie Reyes, SyCip Salazar Hernandez & Gatmaitan
6.3 Dividends From Foreign Subsidiaries Dividends received by local corporations from for - eign subsidiaries are generally included in the local corporations’ gross income, which, after taking into account the allowable deductions provided under the Philippine Tax Code, is subject to an RCIT rate of 25% (or 20%), or MCIT of 2%. However, dividends from foreign subsidiaries may be exempt from tax provided the following conditions are met: • dividends actually received or remitted into the Philippines are reinvested in the business opera - tions of the domestic corporation in the Philip - pines within the next taxable year from the time the foreign-sourced dividends are received; • dividends received are used to fund the working capital requirements, capital expenditures, divi - dend payments, investment in domestic subsidi - aries and infrastructure projects of the domestic corporation; and • domestic corporation holds directly at least 20% of the outstanding shares of the foreign corpora - tion and has held the shareholding for at least two years at the time of dividend distribution. If any of the conditions is not satisfied, the dividends shall be considered as taxable income of the local corporation in the year of actual receipt or remittance, subject to surcharges, interest and penalties, as may be applicable. 6.4 Taxation of Intangibles Developed by Local Corporations Intangibles developed by local corporations may not be used by their non-local subsidiaries in their busi - ness without the former incurring local corporate tax. Local corporations should enter into a sale or licens - ing agreement with non-local subsidiaries pursuant to which the local corporations should receive compen - sation in accordance with the arm’s length principle. Any income derived by the local corporation should be included in its gross income, and after subtracting the allowable deductions, the taxable income shall be subject to RCIT of 25% (or 20%). If local corporations do not recognise income for the use of their intangibles by non-local subsidiaries, transfer pricing issues may arise.
between affiliates should be in accordance with the arm’s length principle adopted by the BIR, and the necessary withholding taxes withheld and paid to the BIR. In determining whether the interest payment transac - tions are at arm’s length, the BIR, under the transfer pricing audit guidelines, will look into various factors, such as the nature and purpose of the debt, the mar - ket conditions at the time the loan is extended, the amount of principal and period of the loan, the secu - rity offered and guarantees, and the amount of debt already held by the borrower. Additionally, no interest expense deduction is allowed if both the taxpayer and the person to whom the inter - est is paid or payable are related parties as specified under the Philippine Tax Code. 6. Taxation of Foreign Income of Local Corporations 6.1 Foreign Income Exemptions The term “local corporation” used here shall refer to a domestic corporation, defined under the Philippine Tax Code as a corporation created or organised in the Philippines or under its laws. Foreign income of local corporations is not exempt from corporate tax as they are taxed on worldwide income. Philippine-sourced income and foreign-sourced income together constitute the local corporation’s gross income. The local corporation pays the higher of RCIT of 25% (or 20%) based on gross income less the allowable deductions provided under the Tax Code, or MCIT of 2% based on gross income. 6.2 Non-Deductible Local Expenses Foreign-sourced income is not exempt from Philip - pine income tax. Hence, local expenses attributable to such foreign-sourced income are deductible, subject to the rules on allowable deductions provided in the Philippine Tax Code.
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