CIR vs. Shinko Electric Industries Co., Ltd.,

GR No. 226287 dated July 6, 2021

FACTS:

Respondent Shinko is a Philippine-registered representative office of a Japanese corporation.  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. Assessments for deficiency income tax and VAT were issued against Shinko. 

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. The CIR claimed that since Shinko is engaged in the “promotion of the parent company’s product” as stated in its SEC Registration, it should be taxed as a Regional Operating Headquarter (ROHQ) which derives income from the Philippines.

The CTA Division declared Shinko is a representative office treated as an RHQ that is exempt from income tax and is not liable to pay VAT.

CTA EB denied the CIR’s Motion for Reconsideration

The CIR maintains that Shinko should be treated as a taxable ROHQ because it renders “qualifying services” as enumerated in Section 22(EE) of the NIRC, as amended

ISSUE:

Whether Shinko is liable for the assessed deficiency income tax and VAT.

HELD:

NO. Section 23(F) of the NIRC, as amended, states that “[a] foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines.” As discussed, a representative office, such as Shinko, does not engage in income-generating activities in the Philippines. Thus, akin to an RHQ, a representative office is considered exempt from income tax and VAT. The amounts subject of the assessment are not considered income and thus, cannot be subject to income tax and VAT. 

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. 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.

The subsidy given to Shinko was not derived in relation to any sale, barter or exchange of goods or services in the course of trade or business. The subsidy was not in payment for goods or properties sold, bartered or exchanged by Shinko.77 As such, the subsidy Shinko received from its parent company cannot be subject to VAT.