Myrna Joy Japos LLB-3

RESEARCH MEMORANDUM

Date: September 6, 2018

To: John Doe

Senior Associate
M & M Consulting Co.

From: Myrna Joy Japos

Junior Associate
M & M Consulting

Re: Investment Vehicles in the Philippines for a Foreign Multinational Corporation

SUMMARY OF FACTS:

A foreign multinational corporation, inquires M & M Consulting on the possible investment

vehicles that the company may consider in regards to its plan do business in the Philippines.

ISSUES:

The foreign corporation posed the following questions:

(1) What are the differences between setting up a local subsidiary in the Philippines and setting
up a Philippine branch office of a foreign corporation, as well as their corresponding tax
implications?;

(2) What are the requirements for establishing a representative office in the Philippines? Is a
representative office subject to income tax in the Philippines?;

(3) Distinguish Regional Area Headquarters (RHQ) from a Regional Operating Headquarter
(ROHQ), including tax implications, if any.

DISCUSSIONS:

1. The differences in setting up a local subsidiary office and a branch office of a foreign
corporation are the following:

a. As to its creation, a local subsidiary involves incorporation under Philippine laws.

On the other hand, doing business through a branch office involves the securing by
the foreign corporation of a license to do business in the Philippines.

b. As to juridical personality, By incorporation, the domestic subsidiary acquires a

juridical personality that is separate and distinct from that of its parent company.
(Sec. 2, Corporation Code). Unlike a domestic subsidiary, a branch office does not
acquire a separate juridical personality but becomes merely an extension of its
parent company. (Sec. 123, Corporation Code)
 c. As to liability of the parent company, in local subsidiary, the parent company shall
not be liable for the obligations of the domestic subsidiary beyond its subscription
to the subsidiary’s authorized capital stock, unless there are circumstances that
warrant the piercing of the veil of corporate fiction, such as its use for the perpetration
of fraud. While in a branch office, the parent company shall be liable for all of
the obligations that the branch office may incur.

d. As to tax treatment and implications, the subsidiary becomes a domestic corporation

while the parent company remains a non-resident foreign corporation. (Sec. 22 (C)
and (I), Tax Code). The domestic corporation is subject to tax based on its taxable
income from all sources, i.e., within and without the Philippines, at the corporate tax
rate of 32%. (Sec. 27 (A), Tax Code) Its parent company, the non-resident foreign
corporation, on the other hand, is subject to tax based on its gross income from
sources within the Philippines at the same tax rate. (Sec. 28 (B) (1), Tax Code). This,
however, is subject to the provisions of an applicable tax treaty which may impose
lower tax rates.

Meanwhile, the foreign company upon obtaining a license to do business through a

branch office becomes a resident foreign corporation (Sec. 22, (H), Tax Code) with
respect to the transactions that are effectively connected with its business in the
Philippines.

A branch office is subject to tax based on its taxable income from sources within the
Philippines at the rate of 32%. (Sec. 28 (A) (1), Tax Code) Branch profit remittances
to the parent company, if they are effectively connected with its business in the
Philippines (considered as income earned as a resident foreign corporation), are
subject to the branch profit remittance tax of 15%. Other income that is not
effectively connected with the business of the branch office (considered as income
earned as a non-resident foreign corporation) may either be subject to the provisions
of the applicable tax treaty, if any, or taxed at the gross amount at the rate of 32%.

2. To establish a representative office in the Philippines, the following requirements must be

met:

The foreign corporation must secure from the Securities and Exchange Commission
(SEC) approval of the License to do business in the Philippines as a representative
office of a foreign corporation with the following:

a. SEC Application Form to Establish a Representative Office in the Philippines.

b. Name verification slip of the company to be used. This should be reserved
manually with the Securities and Exchange Commission for minimal fees for
every 30 days up to a maximum of 90 days subject to renewal or online
through SEC.
c. Certified copy of the Board Resolution of the Parent Company authorizing the
establishment of an office in the Philippines designating a Resident Agent
who may be a Philippine resident individual or domestic corporation.
d. Latest audited financial statements of the parent company certified by an
independent certified public accountant and authenticated by the Philippine
consulate/embassy.
e. Certified copies of the Articles of incorporation of the parent company
 f. Certificate of inward remittance and Certificate of Bank Deposit if the US
$30,000.00 initial capitalization.
g. Resident agent acceptance of appointment, unless, the agent is the signatory in
the application form; and
h. Affidavit executed the President or Resident Agent stating that the applicant is
solvent and sound in its financial condition.

The representative office is exempt from paying income tax in the Philippines. The
representative office is not allowed to engage in income producing activities, as such, for
tax purposes, it is classified as a non-resident foreign corporation not engage in trade or
business in the Philippines. Not being allowed to earn income from operations, it is
exempted from income tax.

3. The distinctions between ROHQ and RHQ are:

e. As to purpose, R.A. No. 8756 defines Regional Operating Headquarters (ROHQ) as

any foreign business entity formed, organized, and existing under any laws other than
those of the Philippines whose purpose is to service its affiliates, subsidiaries or
branches in the Philippines, Asia-Pacific Region, and other foreign markets.

Meanwhile, Regional Headquarters (RHQ) is any foreign business entity formed,

organized, and existing under any laws other than those of the Philippines whose
purpose is to supervise, coordinate and communicate center to its affiliates,
subsidiaries, and branches in the Asia-Pacific Region and other foreign markets.

f. As to capability to derive income, a ROHQ may derive income for the qualifying
services it renders in the Philippines, while a RHQ cannot derive income in the
Philippines. The parent company of the RHQ office may market and sell products to
other companies except for the RHQ office in the Philippines.

g. As to requirements, an ROHQ is required to deposit an initial inward remittance of

US$ 200,000.00 and must submit proof of said remittance to the SEC within 30 days
from receipt of the license.

An RHQ is required to deposit an initial inward remittance of US$ 50,000.00 which

will be registered with the Board of Investment (BOI). It must submit a certificate of
inward remittance from any local bank that it has remitted the amount of US$50,000
within 30 days from the receipt of the SEC registration certificate.

h. As to tax implications and incentives, ROHQ is subject to the preferential rate of 10%
on taxable income; exemption from all kinds of local taxes, fees, or charges except
real property tax on land improvements and equipment; tax and duty-free
importation of equipment and training materials (provided that equipment or material
is not available locally and subject to prior approval of the BOI).

RHQ has an Exemption from Corporate Income Tax (but RHQs still need to file an
annual information return); Exemption from local taxes, fees, and charges; Exemption
from VAT; Tax and duty-free importation of equipment and training materials
(provided that equipment or material is not available locally); and importation of
motor vehicles are subject to payment of taxes and duties.
CONCLUSIONS:

In summary, therefore, the client, a foreign multilateral corporation, would gain more advantage
should it set up a local subsidiary office for purposes of limiting its potential legal liability. For a
local subsidiary, the parent company, in general, shall not be liable for the obligations of the
local subsidiary. While in a branch office, the parent company shall be liable for all of the
obligations that the branch office may incur.

However, as to tax considerations, setting up a branch office would be more beneficial to the
parent company than establishing local subsidiary because the latter is subject to tax based on its
taxable income from all sources, i.e., within and without the Philippines, at the corporate tax rate
of 32%, unless there is an applicable tax treaty imposing lower rates. Meanwhile, a branch office
is subject to tax based only on its taxable income from sources within the Philippines at the rate
of 32%.

Establishing a representative office is also recommended if the client does not intend to pursue
income generating activities in the Philippines since it will be exempted from income tax in the
Philippines.

If the foreign company intends to conduct business and with the purpose of serving its affiliates,
subsidiaries or branches in the Philippines, an ROHQ is good to set up since it is allowed to
derive income for the qualifying services it renders in the Philippines. But if its main purpose is
only to supervise, coordinate and communicate center to its affiliates, subsidiaries, and branches
and not to derive income in the Philippines, then RHQ should be established.

The advantage of setting up a RHQ is that it has an exemption from Corporate Income Tax (but
RHQs still need to file an annual information return); Exemption from local taxes, fees, and
charges; Exemption from VAT; Tax and duty-free importation of equipment and training
materials (provided that equipment or material is not available locally); and importation of
motor vehicles are subject to payment of taxes and duties compared to ROHQ which is subject
to preferential tax rate of 10% on taxable income.

References:

Securities and Exchange Commission Website: http://www.sec.gov.ph/

BP 68 The Corporation Code of the Philippines

The Tax code of the Philippines

Republic Act No. 8756 , THE OMNIBUS INVESTMENTS CODE OF 1987