IN 2011 the Supreme Court ruled in one case that advances between and among related companies are subject to the documentary stamp tax (DST) imposed on loan agreements under Section 180 (now Section 179) of the Tax Code. According to the Court, the instructional letters, as well as the journal and cash vouchers, evidencing the advances extended by one company to its affiliates qualified as loan agreements upon which documentary stamp taxes may be imposed.
Many taxpayers do not agree with the imposition of DST on related party advances, obviously because this entails additional tax cost. Following the SC decision, some taxpayers changed the way they fund the working capital requirements of their affiliates. But advances among related parties cannot be avoided. So the imposition of DST is not also unavoidable.
And for as long as the law is not changed or a different judicial interpretation is made, the tax authority will always apply it in its favor. With the SC decision as its reference, the tax authority became active in pursuing DST on intercompany advances. The Bureau of Internal Revenue (BIR) even issued Revenue Memorandum Circular 48-11, circularizing an excerpt of the decision and enjoining its employees engaged in the audit and review to assess deficiency DST, if warranted, on these kinds of transactions. It is not, thus, unusual to see an assessment imposing DST where among the taxpayer’s transactions are related party advances.
Does this apply also to transactions between a head office and a branch? In a case recently decided by the Court of Tax Appeals (CTA EB Case 1196, November 11, 2015), the facts would indicate that the BIR assessed DST on the advances made by a Philippine branch to its head office based outside the Philippines. In contesting the assessment, one of the arguments raised by the taxpayer is that it cannot issue a debt instrument to its head office because being a branch office, it does not have a separate legal personality from its head office. In other words, under the single entity concept, a foreign head office is the same as its Philippine branch, and therefore the Philippine branch or the head office cannot engage in taxable transaction with the other, they being one and the same juridical entity.
The Court disagreed with this argument by referring to the old case of Marubeni Corp. v. Commissioner of Internal Revenue and Court of Tax Appeals, GR 76573,September 14,1989. In that case, it was held that the general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines is based on the premise that the business of the foreign corporation is conducted through its branch
office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation.
On this basis, the CTA also ruled that the general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply for purposes of imposing the DST. The cash advances and intercompany trade payables and receivables are well within the purview of debt instruments under Section 179 of the 1997 NIRC, as amended.
The implication of this is that if a Philippine branch of a foreign entity enters into cash-advance transactions with its head office, the Philippine branch is doing so in its own capacity as a separate taxable entity. As such, the transaction is subject to DST. Note, however, that this should apply only to transactions between a foreign head office and a Philippine branch or between a Philippine head office and a foreign branch. It should not apply to a transaction between a branch and head office, which are both in the Philippines. In the case of the latter, there is a specific provision in Section 199(i) of the Tax Code, which exempts from DST the inter-branch or interdepartmental advances within the same legal entity.
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The author is a senior partner 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 e-mail the author at fulvio.dawilan@bdblaw.com.ph or call 403-2001 local 310.
