GR 226287; (July, 2021) (Digest)
G.R. No. 226287 , July 06, 2021
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. SHINKO ELECTRIC INDUSTRIES CO., LTD., RESPONDENT.
FACTS
Respondent Shinko Electric Industries Co., Ltd. (Shinko) is a Philippine-registered representative office of a foreign corporation organized under Japanese laws. Its SEC Registration authorizes it to undertake activities such as information dissemination, promotion of the parent company’s products, and quality control. For the fiscal year ending March 31, 2007, the Commissioner of Internal Revenue (CIR) issued a Letter of Authority to examine Shinko’s books, followed by a Preliminary Assessment Notice and a Formal Assessment Notice (FAN) for deficiency income tax and value-added tax (VAT), alleging Shinko derived income from the Philippines. Shinko protested, arguing that as a representative office, it does not derive income from the Philippines and is fully subsidized by its head office, thus not liable for the taxes. The CIR contended Shinko should be taxed as a Regional Operating Headquarter (ROHQ) because its activities included “promotion of the parent company’s product.” The Court of Tax Appeals (CTA) Special Third Division cancelled the assessments, finding Shinko is a representative office treated similarly to a Regional or Area Headquarter (RHQ) exempt from income tax and VAT. The CTA En Banc affirmed. The CIR filed this Petition for Review, maintaining Shinko performs qualifying services of an ROHQ and derives income from Philippine sources.
ISSUE
Whether the CTA Division and CTA EB erred in cancelling the subject deficiency income tax and VAT assessments issued against Shinko covering fiscal year ending March 31, 2007.
RULING
The Petition lacks merit. The Supreme Court upheld the CTA’s findings, ruling that Shinko is a representative office, not an ROHQ, and thus not liable for the deficiency income tax and VAT assessments. A representative office, as defined under the IRR of the Foreign Investments Act, 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. The CTA found Shinko’s evidence sufficient to prove it does not derive income from the Philippines and is fully subsidized. For tax purposes, a representative office is treated similarly to an RHQ, which, under the National Internal Revenue Code (NIRC), is not subject to income tax and is exempt from VAT. In contrast, an ROHQ, which performs specific qualifying services and may derive income, is subject to a 10% income tax and VAT. The Court found Shinko’s stated activity of “promotion of the parent company’s products” in its SEC Registration does not equate to the income-generating “qualifying services” of an ROHQ, such as marketing control and sales promotion. The CIR’s claim that Shinko had investment income was not substantiated. The Court accords finality to the CTA’s factual findings and expertise. Therefore, the assessments were correctly cancelled for lack of legal and factual basis.