QUESTION 1 ESSAY TYPE ( 2012 TAXATION BAR EXAM)

QUESTION 1

Anchor Banking Corporation, which was organized in 2000 and
existing under the laws of the Philippines and owned by the Sy Family of
Makati City, set up in 2010 a branch office in Shanghai City, China, to take
advantage of the presence of many Filipino workers in that area and its
booming economy . During the year, the bank management decided not to
include the P20 Million net income of the Shanghai Branch in the annual
Philippine income tax return filed with the BIR, which showed a net taxable
income of ~30 Million, because the Shanghai Branch is treated as a foreign
corporation and is taxed only on income from sources within the
Philippines, and since the loan and other business transactions were done
in Shanghai, these incomes are not taxable in the Philippines.
a) Is the bank correct in excluding the net income of its
Shanghai Branch in the computation of its annual
corporate income tax for 201 0? Explain your answer.
(5°/o)
b) Should the Shanghai Branch of Anchor Bank remit profit
to its Head Office in the Philippines in 2011, is the branch
liable to the 15°/o branch profit remittance tax imposed
under Section 28 (A)(5) of the 1997 Tax Code?
Explain your answer. (5°/o)




Guys and Ladies, May i know your answers? a simple yes or no with a one sentence legal justification to your answer may suffice.



Question 1 (question a) is a little bit tricky
1. because the examiner is spoonfeeding you with the wrong reasons. you can answer the said question by just answering that anchor bank is correct because a a domestic bank, including its branches abroad (offshore banking unit of a domestic bank) should be taxable from sources within and without the Philippines. but you may not notice that the examiner is asking for more.

the bank may be correct in excluding the income from abroad but it was made for the wrong reason.

clue: fcdu and rbu are separate entities for taxation reporting purposes.


b. for those who can observe, the examiner is also testing your knowledge if you know how to treat the income of an overseas branch of a domestic bank (fcdu with non-residents) for tax purposes?


NOTE: THE bar examiner who framed this question must be a guy who is a stickler for details. this topic has never been asked in the previous bar exams.

NOTE: please take note that the law on this topic has been amended twice already.from 7.5percent final withholding to exempt for non-residents. the bar examiner is testing you if you are updated with the law.

NOTE: this topic is a little bit unfair because this is a difficult provision of law . all books in taxation (except for the book of atty. du-balladad) has never explained this aspect (regarding fcdu, rbu, etc etc)

NOTE: focus your answer on income tax only. dont mention the gross receipts aspect because that is a business tax.

as you may know, all individuals and corporations (assuming they are not exempt) are liable to pay :

1. income tax
2. business tax (either VAT or percentage tax)
(either exempt or Zerorated VAT)
(either exempt from percentage tax)

in the case of banks and similar institutions,there are also these two aspects:
1. income tax
2. business tax in the form of a percentage tax. that percentage tax is called gross receipts tax (5%).


since question number 1 is talking about income tax only, your answer should focus on income tax aspect only, and not on gross receipts (business tax). secondly, the focus of taxation should only be philippine income tax and not Shanghai income tax or shanghai profit remittance tax.








Question 1 (question b)is a simple question that will test your knowledge about what the term "branch profit remittance tax" means. you may also include in your answer the the proper treatment of the income of the said branch in so far as income tax is concerned.





I hope others would give their answers first before I will present mine.


[u][u]

My answer was in this tenor:

a. The shanghai branch is not correct in excluding its net income because the bank being a domestic corporation is liable for income tax for all its income from within the Philippines and without. The bank and its shanghai branch is treated as a single juridical entity liable to income tax from all sources of income within and without the Philippines.

b. NO, because the Bank and its shanghai branch is treated as a single juridical entity liable to income tax from all of its income from sources within and without the Philippines the bank being a domestic corporation.

thanks itrade66 for the answer.

you have stated the general rule. you are on the right path except that in my opinion, you were not able to state the exception to the general rule. the exception to the general rule may be found on the not so long ago amendment to the taxability of offshore fcdu of a local bank (domestic corporations)and the treatment of the BIR (TAX code) with regards to the regular banking unit of a local bank and an offshore banking unit who offers FCDU services to non-resident of a local bank.

the general rule should be stated in one's answer. when you said that a domestic corporation, just like the bank in this case, is liable for income tax for all its income from within and outside (without) the Philippines, you were definitely but partially correct. The bank and its shanghai branch is treated as a single juridical entity liable to income tax from all sources of income within and without the Philippines.

in addition to your answer, you should be able to cite the exception which may be worded as follows:

However, the said general rule admits of one exception (i am not sure if there are other exceptions for domestic corporations other than banks but i only know of one exception for banks. to be safe, you just state the general rule for banks who are domestic corporations because definitely , there is only one exception for banks). The said exception is provided under ____________________________________. ____________________________________________________________________________________________________.

In the case at bar, (conclusion, the law as applied to the case at bar)



NOTE: I may hasten to add also THAT this bar question is a very tricky question.

the question was asking if anchor bank was correct in excluding the income in excluding the income from shanghai branch. what made this question tricky was the wrong reason advanced by Anchor Bank in excluding the income of its shanghai branch.

If the examinee was able to state the general rule as proposed by itrade 66, definitely he can be given a credit. but if the answer mentioned the exception to the general rule, the said lucky examinee may be given full credit. definitely, the examiner will be impressed with the said ANSWER.

nevertheless, these type of questions will definitely separate the grain from the salt (those who can top the bar and those who can just pass it)

for me ,this is an unfair question. definitely, not all know these fcdu and rbu topics. perhaps, only those who are employed with the accounting divison of a local bank can notice this exception to the general rule.

UNFAIR AS IT MAY SEEM, the exception to the general rule is found in the tax code, as amended by a law which became effective on april-may 2004.

you probably referring to sec 28 NIRC tax code, as amended which became effective on april-may 2004.with respect to foreign currency transaction with non residents.

yes. you are right hermie.romano. i will discuss that section 28, as amended, after the holidays. you are definitely correct. that section 28 should be mentioned when you answer the herein bar question because all FCDU TRANSACTIONS WITH NON-RESIDENTS ARE CONSIDERED EXEMPT IN ACCORDANCE WITH AN AMENDATORY LAW WHICH BECAME EFFECTIVE LAST 2004. THAT BEING THE CASE, THE INCOME OF SHANGHAI BRANCH WITH OFWS (NON-RESIDENT) ARE EXEMPTED. BUT I WILL DISCUSS MORE ON THAT AFTER THE HOLIDAYS.


there is also that BIR regulation which treats separately any:

1. regular banking unit of a domestic bank (banks which caters to Philippine peso transactions only. )

2. FCDU of a domestic bank (banks which has foreign currency transactions with residents and non-residents).

that bir regulation is the reason why there are two audits for a domestic bank (say for example RCBC). one bir audit is specifically for fcdu only (dollar transaction) and another audit is for the rbu unit only (pesos transaction). under the NIRC and for reporting purposes only, there are two separate taxpayers for a single domestic bank. but for liability purposes (aside from BIR reporting purposes), the branch and the main office are considered one and the same. [u]

note: not all fcdu transactions are exempt. there are exempt transactions and there are also subject to income tax rates depending on the nature of the transaction and the customer they are dealing with. more on this later.[u]