13/02/2014
www.pwc.com
Sampler on International
Tax Issues
25 January 2014
Agenda
• Analysis of the impact of Philippine branches
− Single entity vs. independent units
− Resident but non-resident
• International tax planning on common transactions
− Franchisor-franchisee structure
− Holdco location considerations
Subtitle •
Isla Lipana & Co., the Philippine member firm of the PwC network
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13/02/2014
Analysis of the Impact of Philippine
Branches
- Single entity vs. Independent units
- Resident but non-resident
Isla Lipana & Co., the Philippine member firm of the PwC network
No single entity concept with intra-transaction
(CIR vs American Express (Philippine Branch)
[G.R. No. 152609. June 29, 2005.])
AMEX
US
AMEX
HK Branch
AMEX
PH Branch
• Branches can deal with each other like independent units
following transfer pricing rules.
Isla Lipana & Co., the Philippine member firm of the PwC network
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Single entity concept in intra-transactions
(Institutional Shareholders Services, Inc. – Philippine ROHQ vs.
CIR [C.T.A. EB CASE NO. 700. December 7, 2011.] [C.T.A. Case No.
7662])
Corporate governance
Head Office
solution
- Logistics
Branch
- Product development
- Data processing
• Services to non-residents are also zero-rated.
• Are services of the ROHQ to its head office qualified for zerorating?
Isla Lipana & Co., the Philippine member firm of the PwC network
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Foreign corporation with a branch may be a nonresident
(Marubeni Corporation vs. CIR [G.R. No. 76573. September
14, 1989.])
Marubeni
Corporation
Branch
AG&P
• A single corporation entity cannot be both a resident and
non-resident corporation.
• Principal agent relationship is a disputable prescription.
Isla Lipana & Co., the Philippine member firm of the PwC network
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Turnkey Contracts vs. Situs of Taxation
(Commissioner of Internal Revenue (CIR) vs. Marubeni
Corporation [G.R. No. 137377. December 18, 2001.])
Yen
Portion
Peso
Portion
Marubeni
Design Engineering Supply Delivery
and Erection
Marubeni
Branch
NDC
• (Fraud assessment for deficiency income tax, branch profit
remittance tax.)
• A turn-key contract – a contract for a piece of work.
Isla Lipana & Co., the Philippine member firm of the PwC network
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International tax planning on
common transactions
- Franchisor - franchisee structure
- Holdco location considerations
Isla Lipana & Co., the Philippine member firm of the PwC network
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13/02/2014
Franchisor location for Philippine-sourced
royalty
• A foreign company with subsidiaries in
various jurisdictions wants to expand
its business into the Philippines
through a franchising arrangement.
Foreign
Parent
Dividends • It has a number of subsidiaries in
various jurisdictions that may execute a
franchise agreement with a Philippine
Foreign
franchisee.
Franchisor
Royalties
Philippine
Franchisee
• To determine the preferred franchisor
jurisdiction from a tax perspective, the
taxation of the income stream from the
Philippines back to the foreign parent
must be compared using different
franchisor locations.
Subtitle •
Isla Lipana & Co., the Philippine member firm of the PwC network
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Franchisor location for Philippine-sourced
royalty
To determine the most tax-efficient
franchisor location, consider the
following implications:
Foreign
Parent
Dividends
• Withholding tax in payor
jurisdiction
• Income tax in recipient jurisdiction
Foreign
Franchisor
Royalties
Philippine
Franchisee
Isla Lipana & Co., the Philippine member firm of the PwC network
• Possible foreign tax credit in
recipient jurisdiction on tax
withheld in payor jurisdiction
(For purposes of simplifying the succeeding illustration,
however, the tax implications at the level of the Foreign
parent is assumed to be neutral regardless of the location of
the foreign franchisor, hence will no longer be compared.)
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Franchisor location for Philippine-sourced
royalty
Tax comparison between Singapore and Japan as potential jurisdictions
Japan
25%1
10%2
17%
30%
42%3
15%4
Nil
20% or 5%5
Foreign
Tax
Issues
Philippine withholding tax on royalties
received by Foreign franchisor
Corporate tax on royalty income
Foreign tax credit based on treaty
Withholding tax on dividends
distributed by Foreign franchisor
Singapore
1 15% rate applies only if paid by BOI-registered firm or if royalties are in respect of cinematographic films or tapes for television or
broadcasting.
2 15% rate applies if royalties are in respect of the use of or the right to use cinematograph films and films or tapes for radio or
television broadcasting; 10% in all other cases.
3 This consists of the Corporation Tax, Enterprise Tax and Inhabitants Tax. The 42% rate is merely an estimate of the effective rate.
The actual tax rate will depend on the profit level, capitalization and location of the company, among other things.
4 For Corporation and Inhabitants Tax only, not for the Enterprise Tax
5 The 20% rate applies unless exemption or a lower rate is provided under a relevant tax treaty. The rate could be lowered to 5%
under existing Japanese treaties subject to a 25% minimum shareholding and a holding period of six months.
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Isla Lipana & Co., the Philippine member firm of the PwC network
Franchisor location for Philippine-sourced
royalty
Simplified calculation of effective tax rate
Royalty payment to Foreign franchisor
Philippine WHT on royalties
Net royalty amount received by Foreign franchisor
Corporate tax in home jurisdiction (net of tax credit)
Amount available for dividend distribution
WHT on dividends
Net dividends received Foreign parent
Effective Tax Rate
Singapore
100
25
75
75
75
Japan
100
10
90
27
63
3.15
59.85
25%
40.15%
For purposes of this simplified and preliminary computation, we have:
•
•
•
•
•
Assumed a royalty payment of P100, without any deductions;
Disregarded the exemption on the first SGD300,000 of taxable income for Singapore tax purposes;
Applied the foreign tax credit in full against the total foreign tax payable;
Not deducted the Enterprise Tax from taxable income; and
Used a 5% treaty rate for Japan.
Isla Lipana & Co., the Philippine member firm of the PwC network
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Franchisor location for foreign-sourced royalty
Philippine
Franchisor
Royalties
Foreign
Subfranchisor
Royalties
Foreign
Franchisee
• A Philippine company owns various
brands that are being franchised
internationally.
• It wants to centralize management of the
foreign royalty income into a single subfranchisor.
• To determine the preferred tax, the
taxation of the income stream from the
foreign franchisees back to the Philippine
franchisor must be compared under the
two potential scenarios.
Isla Lipana & Co., the Philippine member firm of the PwC network
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Franchisor location for foreign-sourced royalty
Philippine
Franchisor
Royalties
Foreign
Subfranchisor
To determine the most tax-efficient
franchisor location, consider the following
implications:
• Withholding tax in payor jurisdiction
• Income tax in recipient jurisdiction
• Possible foreign tax credit in recipient
jurisdiction on tax withheld in payor
jurisdiction
Royalties
Foreign
Franchisee
(For purposes of simplifying the comparison, however, it is assumed
that any withholding tax arising from each franchisee jurisdiction would
be borne by the franchisee, hence it is assumed that the sub-franchisor
would receive the same amount of royalties regardless of whether it is
located in Singapore or BVI. Thus, taxation at the franchisee level,
including the potential tax credit, will not be compared.)
Subtitle •
Isla Lipana & Co., the Philippine member firm of the PwC network
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Franchisor location for foreign-sourced royalty
Tax comparison between Singapore and BVI as potential jurisdictions
Corporate tax on royalty income received by sub-franchisor
Withholding tax on royalties from sub-franchisor to IP Owner
Singapore
BVI
17% or Nil1
0%
10%1
Nil
1 No tax would be imposed if the royalties are considered foreign-sourced income and are not received or deemed
received in Singapore.
2 May be claimed as foreign tax credit/deduction by the Philippine IP Owner
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Isla Lipana & Co., the Philippine member firm of the PwC network
Foreign Holdco vs. Local Holdco
Foreign
Parent
Foreign
Parent
Foreign
Holdco
Phil
Holdco
40%
Filipino Co
60%
Real
Estate
Company
Isla Lipana & Co., the Philippine member firm of the PwC network
40%
Filipino Co
60%
Real
Estate
Company
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Treaty vs. Non-treaty Holdco Location
Cayman
Islands
Netherlands
• 15% dividend withholding tax
• Subject to capital gains tax
• Dividend income not subject to tax
in Cayman Islands
Sub
• 10% dividend withholding tax
• Exempt from capital gains tax
• Dividend income may be
exempt if not portfolio
investment
Sub
Subtitle •
Isla Lipana & Co., the Philippine member firm of the PwC network
Subtitle •
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For PH Multinational
Foreign HoldCo location
Philippine
Company
An attractive tax regime for a holding
company’s holding and financing
activities would generally have:
• Exemption from taxes on different
income streams such as interest,
dividends and capital gains
Philippine
Holding
Company
Foreign
Holding
Company
• Exemption from WHT on dividends
distributed by the holding company
Philippine
Operating
Subsidiaries
Foreign
Operating
Subsidiaries
• Exemption from transfer taxes upon
disposal of the HoldCo shares
Subtitle •
Isla Lipana & Co., the Philippine member firm of the PwC network
• Extensive tax treaty network which
may result in potentially nil/ lower
withholding taxes
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Foreign HoldCo location
Other non-tax considerations:
Philippine
Company
Philippine
Holding
Company
Foreign
Holding
Company
Philippine
Operating
Subsidiaries
Foreign
Operating
Subsidiaries
- Low establishment and operating
costs, e.g. minimal substance
requirements and minimal
accounting/reporting requirements
- A sophisticated environment with
no exchange control/ profit
repatriation constraints
- A stable economy from a political,
commercial and legal perspective
- Simple and cost effective with
respect to unwinding, both from an
operational and tax perspective
Subtitle •
Isla Lipana & Co., the Philippine member firm of the PwC network
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In tax planning, caution is more
important than confidence.
- ABC
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13/02/2014
Thank you.
Isla Lipana & Co., the Philippine member firm of the PwC network
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