APAC Tax Matters: 12th edition

Philippines

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At a glance

  • In a merger of two foreign corporations, the surviving corporation cannot continue operating the Philippine branch office of the absorbed corporation until it files its own license to do business in the Philippines.
  • The registration requirement under the Foreign Investment Act for increases in foreign equity participation does not apply to corporations already 100% foreign owned when the FIA was enacted.
  • A tax treaty relief application (TTRA) must be filed at least 15 days before any transaction that will seek to avail itself of the relief in question.
  • Royalties paid for the use of trademarks are generally subject to Value Added Tax (VAT). However, when the income payer is registered with the Philippine Economic Zone Authority (PEZA) to whom VAT may not be passed on, the royalties shall be exempt from VAT.

Effect of merger of two foreign corporations on the absorbed corporation’s Philippine branch office

The Securities and Exchange Commission (SEC) ruled on the effect of the merger of two foreign corporations on the absorbed corporation’s Philippine branch office.

In this opinion, C Co. was a corporation duly organized and existing under the laws of the USA. Its subsidiary, E Co. was also a corporation duly organized and existing under the laws of the USA. E Co. was previously granted a license to establish a Philippine branch, E Co. – Philippine Branch. The management of C Co. and E Co. planned to merge the two corporations, where C Co. would be the surviving corporation.

If the merger proceeded, C Co. planned to continue operating E Co. – Philippine Branch, subject to its change of name with C Co. as its new head office.

However, the SEC ruled that pursuant to Paragraph 2 of Section 132 of the Corporation Code of the Philippines, if there is a merger of a licensed foreign corporation with another corporation of its home country which is not doing business in the Philippines, the licensed foreign corporation absorbed in the merger must ask for the withdrawal of its license to do business in the Philippines.

Should the surviving foreign corporation wish to continue the business of the absorbed corporation in the Philippines, it is required to file its own application for a license to do so in accordance with Philippine laws.

As prescribed by Corporation Code of the Philippines, the absorbed corporation has 60 days after the merger becomes effective, to (1) file with the SEC a copy of the articles of the merger duly authenticated by the proper official/s of the country/state under the laws of which the merger was effected and (2) file a petition for withdrawal of the relevant license.

If the surviving corporation plans to continue operating the Philippine branch of the absorbed corporation, the surviving corporation must (1) file its own application for a license to do business in the Philippines, (2) comply with all the requirements of the SEC’s Company Registration and Monitoring Department which include providing a certification stating that the laws of the foreign country relating to mergers provides for substantially the same effects as Philippine law, and reproducing the exact provisions of the applicable foreign law.

The effects of a merger under Philippine law provide that the surviving corporation shall possess all the rights, privileges, immunities and franchises of the constituent corporations; and all property, real or personal, and all receivables due, including subscription of shares and other choses in action, and all interest belonging to, or due the constituent corporations, shall be deemed transferred to and vested in the surviving corporation without further act and deed. (SEC-OGC Opinion No. 12-14 dated 28 August 2012)

SEC registration to increase foreign equity participation and existing foreign corporations incorporated before the enactment of the Foreign Investments Act in 1991

The Securities and Exchange Commission (SEC) ruled that the registration requirement under the Foreign Investments Act (FIA) for increases in foreign equity participation does not apply to corporations already 100% foreign owned when the FIA was enacted.

In this SEC opinion, P Co. was a domestic corporation wholly owned by L Co., another domestic corporation. L Co.’s capital was 99.78% owned by A Co., a foreign corporation. This made P Co. 100% foreign-owned.

Thirty years after P Co. was incorporated, the FIA was enacted. Pursuant to the FIA, a foreign national wishing to  do business in the Philippines, or to invest in a domestic enterprise up to 100% of its capital, must  register with the SEC.

However, as prescribed by the implementing rules and regulations of the FIA, existing foreign-owned corporations, which intend to increase the percentage share of foreign equity participation, may be allowed if the investment area does not appear in the Foreign Investment Negative List.

Given that  P Co. was already 100% foreign-owned when the FIA was enacted, the SEC ruled that there could be no further increase in foreign equity that would require registration with the SEC. (SEC-OGC Opinion No. 12-14 dated 28 August 2012).

Deadline for filing tax treaty relief applications and the imposition of VAT for the use of trademarks

Any availment for tax treaty relief shall be preceded by an application filed with the International Tax Affairs Division (ITAD) of the Bureau of Internal Revenue (BIR) at least 15 days before the intended transaction or payment of income.

In two separate BIR opinions, two companies tried to avail themselves of the preferential tax rate on royalties under the Philippines-France and Philippines-Japan tax treaties. However, the TTRA for the Philippines-France tax treaty was only filed after the two trademark agreements had been in effect for 7 years and 10 months, respectively, while the TTRA for the Philippines-Japan tax treaty was only filed after the trademark agreement had been in effect for 5 years.

Because of the delay in filing the relevant TTRA applications, none of the royalties paid prior to the date of filing the respective TTRA applications, and 15 days thereafter, were entitled to the preferential tax rates under the Philippines-France and Philippines-Japan tax treaties. Instead, the royalties were subject to the regular income tax rate of 35% (now 30%). Only royalties paid 15 days after the date of filing of the TTRA were subject to the preferential tax rates under the treaties.

Royalties paid by an entity registered with the Philippine Economic Zone Authority (PEZA).

Generally, royalties paid for the use of trademarks are subject to Value Added Tax (VAT). However, if the income-payor is a PEZA-registered entity to whom VAT may not be passed on, the royalties shall be treated as exempt from VAT. (BIR Ruling No. ITAD 358-2012 dated 18 October 2012 and BIR Ruling No. ITAD 365-12 dated 24 October 2012).

PEZA registered entities are entities involved in export-oriented manufacturing and service facilities inside selected areas throughout the Philippines proclaimed by the President of the Philippines as PEZA Special Economic Zones.