Myrna Joy Japos LLB 3

Taxation 1

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 but it does not acquire separate juridical entity.

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).

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:

a. 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:

a. 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.

b. 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.

c. 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.

d. 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.