RAMO 1-95

Copyright 1994-2012 CD Technologies Asia, Inc. Taxation 2011 1

March 21, 1995

REVENUE AUDIT MEMORANDUM ORDER NO. 1-95

SUBJECT : Audit Guidelines and Procedures on the ProperDetermination of the Income Tax Liability of PhilippineBranches and Liaison Offices of Multi-NationalEnterprises (MNEs) Engaged in Soliciting Orders,Purchaser, Service Contracts, Trading, Construction andOther Activities in the Philippines

TO : All Internal Revenue Officers, Employees and OthersConcerned

I. RATIONALE

Whereas Revenue Audit Memorandum Order (RAMO) No. 1-86 datedApril 25, 1986 imposes income tax on the gross income generated fromconstructive trading and commission income derived from brokering activities ofPhilippines branches of MNEs engaged in trading activities.

Whereas RAMO No. 1-86 makes no recognition of such factors as thenature of item traded, the risk involved and participation of the local branch;

Whereas the implementation of RAMO No. 1-86 makes use of muchapproximations and estimates;

Therefore, this Order is issued to revise RAMO No. 1-86 and to covertaxation of Philippine branches and liaison offices of MNEs engaged in solicitingorders, purchases, services contracts, trading, construction and other activities.

With this Order, taxation of Philippine branches and liaison offices ofMNEs engaged in soliciting orders, purchases, service contracts, trading,constructions and other activities becomes more practical, easy and equitable. Atthe same time, this Order addresses taxation of construction and other activities bythe same Philippine branches and liaison offices of MNEs as separateundertakings.

II. OBJECTIVES


This Order is issued to:

a) Amend and supersede RAMO No. 1-86 dated April 25, 1986which provides for the procedures for tax audit of Philippinebranches or foreign corporation.

b) Address the issue on the proper determination of the income taxliability of Philippine branches and liaison offices of MNEspursuant to Section 43 of the National Internal Revenue Code(NIRC) wherein the Commissioner of Internal Revenue (CIR)is authorized to distribute, apportion or allocate gross income ordeduction among organizations in order to clearly reflect theincome of any such organization.

c) Provide guidelines on implementation of policies on the properdetermination of the income tax liability of Philippine branchesand liaison offices of MNEs.

d) Prescribed the minimum procedure required in the audit of theincome tax liability of Philippine branches and liaison officesof MNEs.

III. COVERAGE

a) This Order shall pay only to Philippine branches and liaison ofJapanese trading firms which are members of the Sogo Shoshasand registered with the Japanese Chamber of Commerce andIndustry (JCCI), and also all other foreign trading companiessimilarly situated as determined by the Commissioner ofInternal Revenue.

b) Furthermore, the content of this Order will apply only toincome tax liabilities of Philippine branches and liaison officesof MNEs and will not affect the withholding, including branchprofit remittance, and business tax obligations of the samePhilippine branches and liaison offices of MNEs which shall besubject to the provisions of the National Internal Revenue Code(NIRC).

IV. GUIDELINES

1. The Philippine income tax due from soliciting orders,purchaser, service contracts, trading, construction and otheractivities of the Philippine branches and liaison offices of


MNEs will be ascertained using the following formula.

For solicitation and trading activities{(Worldwide Operating Sales to the Philippines attribution tax)}{( Income X Worldwide Sales X rate X rate )}

For construction and other activities

plus {(Net Income from construction and other activities X tax rate)}

2. In implementing the above formula, the following terms shallbe construed to mean as follows:

(a) Worldwide (W/W) shall include head office accountsand those of branches located in difference countries butshall exclude subsidiary accounts.

(b) W/W Operating Income shall include the Gross Incomeminus Selling General & Administrative expenses.Operating Income does not include non-operating andextraordinary items like interest expense, exchangeprofit/loss capital gains/losses or other income/loss notrelated not related to operation.

(c) Sales to the Philippines shall be defined as theaggregated amount of exports and offshore transactionsto the Philippines by the Head Office, all branches andliaison offices and shall include the amount of indenttransactions from which commissions are generated.These shall also include imported materials andequipment of construction projects undertaken in thePhilippines, but shall exclude local service income fromconstruction projects or onshore income from localconstruction.

(d) W/W Sales shall consist of domestic, export, import andoffshore transactions which include nor only principaltransactions but also indent transactions from whichcommissions are generated.

(e) Attribution rate shall mean a rate of 75% to be appliedagainst formula.

(f) The tax rate to be applied shall be in accordance with


Section 25(a) of the NIRC which is 35%.

(g) Net income on construction shall consist of local serviceincome from construction projects income fromconstruction projects less the costs associated with localconstruction projects including the cost of locallypurchased materials equipment, if any.

(h) Net income on all other activities shall consist of incomesuch as branches and liaison offices of MNEs areengaged in, net of costs and expenses associated withsuch income.

3. In the application of the formula, no offsetting of losses fromone line of business to the detriment of the other line ofbusiness shall be allowed. This would mean that the tax duefrom each line of business shall be computed independentlyfrom the other line of business.

V. PROCEDURES

1. Request documents containing information on the nature ofbusiness transactions of the taxpayer as follows:

a) the structure of the Philippine branch or liaison office,the Home Office, other branches or more than 50%owned or controlled subsidiaries located outside thePhilippines dealing with the local branch;

b) the ownership, relationship, extent of control, directorsand officers of the Philippine branch or liaison officeand the Home Office;

c) the business activity of the MNE and how it relates tothe activity of the local branch or liaison office and otherbranches or more than 50% owned or controlledsubsidiaries dealing with the local company

2. Ascertain the mathematical accuracy and completeness of theincome tax return, financial statements and supportingschedules filed by the taxpayer.

3. Require the submission of financial statements exclusive fortransactions dealing with construction and all other activities


and have a certified public accountant render an opinion as toits fairness and conformity with accepted accounting standards.

For solicitation/trading activities

4. Obtain a copy of the Worldwide Financial Statement dulycertified by an independent public accountant of the countrywhich issues the financial statements and authenticated by thePhilippine Embassy or Consulate situated within the countrywhere the Home Office of the MNE is located.

5. Verify correctness of Worldwide Operating Income and theWorldwide Sales figures against the financial statementsobtained in 4 above.

6. Request for a summary of Sales to the Philippines duly certifiedby an independent public accountant and authenticated by thePhilippine Embassy or Consulate situated within the countrywhere the Home Office of the MNE is located. The Sales to thePhilippine shall include the offshore portion of the localconstruction projects which includes the supply of machineryand equipment.

7. Request for presentation of copies of pertinent sales invoices,bills of lading, freight and insurance coverages and otherdocuments to verify Sales to the Philippines, on a test samplingbasis.

For construction activities

8. Review all Contracts and analyze the nature of the Contracts,the parties involved, the terms and conditions, the total contractprice, the payment and other pertinent information.

9. Determine method of accounting, whether completed contractor the percentage of completion, and check the correctness oftake up in the books of accounts.

10. Segregate the income from exempt transactions from that oftaxable transactions, if applicable.

11. Determine the total contract price and composition of theproject. The total contract price includes:a. Supply of Machinery and Equipment


(Sometimes referred to as the "offshore portion") xxb. Supply of Labor/Civil Works (Sometimes referred to as the "onshore portion") xx Total Contract Price xx ====

12. Verify that only the supply of local/civil works (onshoreportion) is included in computation of profit/loss on localconstruction project.

13. Determine if costs and expenses corresponded only to theservice portion of the project referred to in 11 above.

14. Be aware of charging of income and expenses by mere bookentries using the branch/home office account.

For all other activities

15. Verify that all income from other activities are included as partof the gross income

16. Ensure that only expenses related to the activities above areincluded in the determination of the net income.

VI. EFFECTIVITY

This Order shall take effect immediately.

LIWAYWAY VINZONS-CHATOCommissioner of Internal Revenue

RAMO 1-95

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