Commissioner of Internal Revenue Vs. Shinko Electric
Industries Co., Ltd.G.R. No. 226287. July 6, 2021
FACTS:
Respondent Shinko is a
Philippine-registered representative office of the foreign corporation
Shinko Electric Industries Co., Ltd., a company organized and existing under
the laws of Japan. It is licensed in the Philippines as a representative office to "undertake
activities such as but not limited to information dissemination, promotion of
the parent company's products, quality control of products as well as all other
activities which may be legally undertaken by a representative office.
On October 16, 2009, Shinko received a Letter of Authority for
the examination of its books of accounts and other accounting records for all
internal revenue taxes for the period from April 1, 2006 to March 31, 2007.
On April 12,2010, Shinko received a Preliminary Assessment
Notice (PAN) together with the Details of Discrepancies from the CIR for alleged
deficiency income tax and VAT covering the fiscal year ending March 31, 2007.
Thereafter, Shinko filed its reply to the PAN.
On May 14, 2010, Shinko received from the CIR a Formal
Assessment Notice with Details of Discrepancies.
Shinko duly protested the FAN and the Assessment Notices. Shinko
argued that it is a representative office of a foreign corporation, and, as
such, it does not derive income from sources within the Philippines. Hence, it
is not liable for deficiency income tax and VAT, as well as the compromise
penalty.
On the other hand, the CIR claimed that since Shinko is
engaged in the "promotion of the parent company's product", it should
be taxed as a Regional Operating Headquarter which derives income from the
Philippines.
ISSUE:
Whether or not Shinko should be taxed
RULING:
The term "representative office" is not explicitly
defined under the NIRC, as amended. However, a definition thereof can be found
in Section l(c), Rule I of the IRR of RA No. 7042, as amended, which states:
x x x Representative or liaison
office deals directly with the clients of the parent company but does not
derive income from the host country and is
fully subsidized by its head office. It undertakes activities such as
but not limited to information dissemination and promotion of the company's
products as well as quality control of products.
It can be gleaned from the foregoing that a representative
office has the following characteristics:
a.) It is fully subsidized by its
head office;
b) It deals directly with the
clients of its parent company;
c) It undertakes activities such
as but not limited to information dissemination, promotion of the parent
company's products as well as quality control of products; and
d) It does not derive income in the Philippines.
On the other hand, an RHQ is an office principally intended
to render administrative services. It is not allowed under the law to
participate in any manner in the management of any subsidiary or branch office
it might have in the Philippines or to solicit or market goods and services
whether on behalf of its mother company or its branches, affiliates,
subsidiaries or any other company. RHQ's activities are limited to acting as
supervisory, communications and coordinating center for its affiliates,
subsidiaries or branch offices in the region. In performing such activities, an
RHQ does not earn or derive income in the Philippines. Consequently, the NIRC
exempts RHQs from income tax and VAT.
In stark contrast to an RHQ, an ROHQ is allowed by law to
perform activities that generate income in the Philippines. These activities,
termed as "qualifying services", include the following: (1) general
administration and planning; (2) business planning and coordination; (3)
sourcing/procurement of raw materials and components; (4) corporate finance
advisory services; (5) marketing control and sales promotion; ( 6) training and
personnel management; (7) logistics services; (8) research and development services,
and product development; (9) technical support and maintenance; (10) data
processing and communication; and (11)
business development. However, similar to an RHQ, an ROHQ performs services
only with the head office's affiliates, branches or subsidiaries. ROHQs are
also prohibited by law to directly or indirectly market the goods and services
of their mother company and its affiliates.
As regards taxes, inasmuch as an ROHQ is primarily engaged
in activities that generate income in the Philippines, it is considered a taxable entity under the NIRC, as amended,
and is subject to 10% corporate income tax and 12% VAT.
In sum, the following are the similarities and differences
among a representative office, an RHQ, and an ROHQ:
1. A representative office and an
RHQ are not allowed to engage in any income-generating activities in the
Philippines. An ROHQ, on the other hand, provides qualifying services that
generate income in the Philippines.
2. Both a representative office and an RHQ do not earn
or derive income in the Philippines. An ROHQ is allowed to derive income in the
Philippines.
3. Unlike an RHQ and an ROHQ, a
representative office deals directly with the parent company's clients and not
with the affiliates, branches, or subsidiaries.
4. Under the NIRC, as amended, RHQs are exempt from both
income tax and VAT so long as they do not render any of the qualifying
services, whereas ROHQs shall be subject to a tax rate of 10% of their taxable
income from its qualifying services and 12% VAT.
The Court agrees with the CTA that a representative office,
while not defined under the NIRC, is akin to an RHQ.
The Court found that Shinko is a representative office.
The amounts subject of the assessment are not considered
income and thus, cannot be subject to income tax and VAT.
Income is "defined as an amount of money coming to a
person or corporation within a specified
time, whether as payment for services, interest or profit from investment.
Unless otherwise specified, it means cash or its equivalent. It can also be
thought of as a flow of the fruits of one's labor.
Further, in defining income, the Court in case of Madrigal
and Paterno v. Rafferty and Concepcion differentiated it from capital and said
that "[t]he essential difference between capital and income is that
capital is a fund; income is a flow. A fund of property existing at an
instant of time is called capital. A flow of services rendered by that capital
by the payment of money from it or any other benefit rendered by a fund of
capital in relation to such fund through a period of time is called income.
Capital is wealth, while income is the service of wealth." Thus, an income
tax is arbitrary and confiscatory if it
taxes capital because capital is not
income. In other words, it is income, not capital, which is subject to income
tax.
Likewise, case law instructs that for income to be taxable,
the following requisites must exist: (1) there must be gain; (2) the gain must
be realized or received; and (3) the gain must not be excluded by law or treaty
from taxation.
In the case of Shinko, the amounts considered by the CIR as
Shinko' s income actually came from the subsidies remitted by its head office
abroad, for Shinko's operations in the Philippines. Certainly, these
remittances cannot be considered as income because they are not payment for the
services rendered by Shinko. They cannot be regarded as a gain realized by
Shinko or a flow of fruits from Shinko's labor. At the very least, the
remittances Shinko received as subsidy from its parent company can only be
regarded as capital which is intended for the continued operation of a
representative office in the Philippines, and from which no income tax may be
collected or imposed.
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