Kria, Inc., a Korean corporation engaged in the business of manufacturing electric vehicles, established a branch office in the Philippines in 2010. The Philippine branch constructed a manufacturing plant in Kabuyao, Laguna, and the construction lasted three (3) years. Commercial operations in the Laguna plant began in 2014.
In just two (2) years of operation, the Philippine branch had remittable profits in an amount exceeding 175% of its capital. However, the head office in Korea instructed the branch not to remit the profits to the Korean head office until instructed otherwise. The branch chief finance officer is concerned that the BIR might hold the Philippine branch liable for the 10% improperly accumulated earnings tax (IAET) for permitting its profits to accumulate beyond reasonable business needs.
(a) Is the Philippine branch of Kria subject to the 10% IAET under the circumstances stated above? (2.5%)
(b) Is it subject to 15% branch profit remittance tax (BPRT)? (2.5%)
Suggested answer only. Not an official answer and not legal advice.
**Answer:** (a) No, Kria's Philippine branch is not subject to the 10% IAET. (b) No, it is not currently subject to the 15% BPRT. **Legal Basis:** Under Section 29 of the NIRC and RR No. 2-2001, IAET applies exclusively
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Quick check
To which type of corporate entity does the improperly accumulated earnings tax under Section 29 of the Tax Code strictly apply?
Under Section 29 of the Tax Code, improperly accumulated earnings tax applies exclusively to domestic corporations and not to foreign corporations.
When does the fifteen percent branch profit remittance tax accrue under Section 28(A)(5) of the Tax Code?
Branch profit remittance tax is imposed solely when branch profits are actually or constructively remitted to the head office.
How is a Philippine branch of a Korean manufacturing company classified for Philippine income tax purposes?
A branch office established in the Philippines by a foreign corporation is classified as a resident foreign corporation.
What is the tax consequence if a resident foreign branch retains its profits locally without remitting them to its foreign head office?
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Which component forms the tax base for the fifteen percent branch profit remittance tax under Section 28(A)(5) of the Tax Code?
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Learn more about these topics
1. Improperly Accumulated Earnings
Under Section 29 of the National Internal Revenue Code and Revenue Regulations No. 2-2001, the improperly accumulated earnings tax is a penalty tax imposed on corporations that accumulate earnings beyond reasonable business needs rather than distributing them as dividends. The primary objective of this tax is to compel corporations to declare dividends so that stockholders become subject to income tax thereon. However, the improperly accumulated earnings tax applies exclusively to domestic corporations. Resident foreign corporations, such as local branch offices of foreign entities, are expressly exempt from this tax liability.
2. Branch Profit Remittances
Under Section 28(A)(5) of the Tax Code, any profit remitted by a Philippine branch office to its foreign head office is subject to a branch profit remittance tax of fifteen percent. This tax is based on the total profits applied or earmarked for remittance without any deduction for the tax component. Crucially, branch profit remittance tax accrues only upon the actual or constructive remittance of profits to the foreign head office. Unremitted earnings retained by the local branch for business purposes are not subject to branch profit remittance tax.
3. Resident Foreign Taxation
Under Section 28(A)(1) of the Tax Code, a foreign corporation engaged in trade or business within the Philippines through a branch office is classified as a resident foreign corporation. Resident foreign corporations are subject to Philippine corporate income tax only on income derived from sources within the Philippines. Unlike domestic corporations, which are subject to tax on worldwide income and liable for improperly accumulated earnings tax, resident foreign corporations are subject to specialized taxation rules tailored strictly to their local branch operations and actual profit remittances.