CTA Case No. 4589 (Decision)

Republic of the Philippines COURT OF TAX APPEALS Quezon City MARUBENI CORPORATION Manil.-a Branch, Petitioner, - versus - C.T.A. CASE NO. 4589 THE COMMlSSIONER OF Promul.~ated: ~ r INTERNAL REvENuE, Respondent. APR 1ul95 X -- - � - - - - ------------ - -- - - -- - - -- - - -�-- - -~ .E: c; sI 0N Petitioner Marubeni Corporation, I'tanila Branch, seeks a review of the decision of respondent Commissioner of Internal Revenue in assessing under Section 208 (now Section 194> of the National Internal Revenue Code <NIRC> petitioner's deficiency in broker's tax in the amount of F2, 134,871.23 inclusive of interests, surcharge and compromise penalties for the fiscal year ending March 31, 1988 as follows: Tax Deficiency t basic I P 1,097,463.00 Add : Surcharge :274,365.75 Interests (various! 738,042.48 Co111p10111ise penalt_y 25,020.00 Total aaount due and collectible P 2,134,871.23 59(

DEC I S I 0 N- C.T.A. Case No. 4589 -2- To support its case, petitioner alleges that: it is a resident �oreign corporation organized and existing under the laws o� Japan and duly licensed to engage in business under Philippine laws with branch o��ice at the 8th and 9th Floor, L.V. Locsin Building, Makati Avenue, corner Ayala Avenue, Makati, Metro Manila; the subject de�iciency assessment is based mainly on petitioner's receipt o� compensation �rom the Head O��ice .:for soliciting~, orde.T~~ �rom Philippine �rom head ,.'.. � . �a , customers; that the said compensation o��ice cannot be considered commission subject to the 7% commercial broker's tax prescribed under Section 203 o� the Tax Code then in �orce, that petitioner in liaising �or its Head O��ice in lo~king �or Philippine customers is not an act that is rendered �or another person, but �or itsel� considering that Marubeni <Philippines> and Marubeni <Japan) constitute one single taxable entity; in rendering such liaising service to its Head O��ice �or sales directly made by the latter to Philippine customers, the Head O��ice allocated certain amounts to petitioner as compensation to cover its operating requirements, which amounts were reported to the Central Bank and converted to 598

DE C I S I 0 N- C.T.A. Case No. 4589 -3- pesos and were also reported as income in petitioner's income tax return; and in its transaction, only two parties are involved, the Head O��ice and the Philippine customers, the petitioner as Branch being an integral part o� the Head O��ice; hence there could not be a broker/agency transaction and accordingly the compensation received by the Branch �rom its Head O��ice cannot be considered commissions or brokerage �ees subject to broker's tax. On the other hand, respondent contends that Marubeni Corporation, petitioner's Head O��ice, based in Tokyo, Japan is primarily engaged as "Trading House" �or importers and exporters. It has subsidiaries and branch o��ices world wide. Since import-export trade transcends national boundaries, brokerage services are rendered through the branch o�~ices and subsidiaries where exporters and importers are based. Marubeni Corporation <Manila Branch> is a multinational enterprise which is a combination of companies o� di��erent nationality connected by stockholdings, managerial control and constituting an economic unity but are in �act separate legal units; that although petitioner and its Head O��ice constitute a single 599

DE C I S I 0 N- C.T.A. Case No. 4589 - 4- economic unit, their legal structures are separate and distinct �rom each other and c9nstituting two taxable entities; that �or bringing about sales or purchases o� merchandise �or Japanese traders and Filipino businessmen or bringing together proposed Filipino buyers and Japanese or other �oreign sellers, petitioner is e commercial broker; that petitioner has a distinct character, independent of its Head O��ice; it is a separate business entity so that its income and expenses are segregated �rom those o� the home o�fice in order to clearly its operating results; petitioner independently o� its heed o�fice, acted as broker to both its Philippine~ customers and manufacturers abroad, other than Marubeni Corporation <Japan> and for its services rendered in the Philippines it �received commission income in the total amount of ~45,701,940.00 from the head office which are taxable, petitioner being a commercial broker pursuant to Section 157<t> of the Tax Code, as amended. Hence, for the failure to pay the 71. commercial broker's tax, petitioner was assessed in the amouR~ of P2,134,871.23. : :>'!: P.tttioner offered in evidence its Fina~cial '' ~ . . ��~_, ' Statements for 1987 and 1988 iBxh. A> to show that 600

DEC I S I 0 N- C.T.A. Case No. 4589 - 5- the said Financial Statements cover the speci�ic taxable pEPriod subject 'ox this case~ the entry ' on page 3 o� Exhibit H showing the amount o� P45,701,940.00 as petitioner's subsidy �rom its Home Office; the commercial/invoices issued by the Home Office <Exh. B to G> to show that the Home Office is the seller of the goods covered by said invoices; the petitioner's "Business Op~ration Diagram/Flow Chart" <Exh. H> to show that there was no agency contract between th� Japanese manufacturers/suppliers and the petitioner; and the authentication of the Notarial Certification dated January 28, 1993 issued by Marubeni Corporations Traffic Department in Japan ( Exh. H-1> to show the authentication and due execution of the Commercial invoic~a, Exhibits � B to G. Exhibits A to H-1 inclusive o� their submarkings,. were admitted subject to the Court's appreciation and final determination of their purposes, materiality, relevancy and probative is similar ~8:fTA Case No � 4110 . ~:, between .lhet same parties, whe:re,>~Jl th~~(;ourt �ound for the respondent. C:ase No. 4110 is on appeal be�ore the Court o� 601

DEC I S I 0 N- C.T.A. Case No. 4589 -6- Appeals, this Court does not �ind any compelling reason to depart there�rom and so it adopts the pertinent portions thereo� which are quoted hereunder: "As de�ined a multinational enterprise is a combination o� companies o� di��erent nationality connected by means o� shareholdings, managerial control and constituting an economic unity. One basic idea which is common to all multinational enterprises is the disparity between economic and legal entity. Whereas, they are viewed as single unit, yet they are in truth and in �act separate legal units <Hultinational Enterprises by Robert Emmett Tindal, page V, XV>. From the above cited de�inition o� what a multinational enterprise is, we can very well opine that Marubeni Corporation, Manila Branch and its head o��ice constitute a single economic unit but the legal structures are separate and distinct �rom each other thus constituting two <2> taxable entities. The �act remains that petitioner is engaged as commercial broker� �or its export - import trade considering that its export - import trade transcends national boundaries, Marubeni Corporation, Manila Branch is rendering brokerage services in the Philippines in bringing about sales or purchases o� merchandise o� Japanese and other �oreign traders and Filipino businessmen or in bringing together proposed Filipino buyers and Japanese or other �oreign sellers in the Philippines. Under Section 187 <t> o� the 1977 Tax Code, a commercial broker is de�ined as �allows: 602

D E C I S I 0 N -. C.T.A. Case No. 4589 -7- "<t>. "Commercial broker" includes all persons, other than importers, manufacturers, producers or bona fide employees, who for compensation or profit, sell' or bring about sales or purchases of merchandise for other persons, or bring proposed buyers and sellers together, or negotiate freights or other business owners of vessels or other means of transportation, or for the shippers, or consignors or consignee of freight carried by vessels or other means of transportation. The term includes commission merchants". As it is, from the aforecited provision of the Tax Codet it can very well be concluded that indeed petitioner is a commercial broker. For all the brokerage services rendered by Marubeni Corporation branch in Manila, it received commissions from Marubeni Corporation, Head Office, a definite percentage from the commissions income received by the latter in a completed operation of brokerage services. This commission income was declared by Marubeni Corporation, Manila Branch, as subsidy from home office. It is however reported by the latter as income in its Statement of Income and Expenses for the � period ended March 31, 1985 and 1984 attached to its Corporation Annual Income Tax Return. For the commissions that they earned from the brokerage transactionst Marubeni Japan allocates a certain portion of that income out of the transaction for the services rendered by Marubeni Branch. It can be readily seent in the course of the transaction that the source of the subsidy is tied with the import and export transaction. Now, with regard to the pattern of percentage being sent as subsidy, the same is computed as based on percentage on sales price or on fixed amount based on quantity. The Court considers said 603

DEC I S I 0 N- C.T.A. Case No. 4589 -8- amount as commissions contrary to the petitioner's claim. It is likewise noted that it is the Head O��ice <Marubeni Japan> that allocates the commissions as compensation �or the services rendered by its Philippine branch. We cannot give �due assent to petitioner's claim that what it allocates to the Marubeni Branch are mere subsidies in the truest sense o� , the word. To our mind, it is more o� a commission considering the �act that the amount o� subsidies remitted varies, dependent upon the sales price or based on quantities. Furthermore, i� these subsidies are only given to �inance the transactions being undertaken by the branch o��ice in �avor o� the mother company, then there would then be no need to determine the percentage o� the subsidies on the basis o� sales price and quantity. The bigger the amount involved in the transaction, the bigger the commissions, the amount given by the Head O��ice is always dependent on the import - export transaction. The term commissions, as de�ined are the allo~ances to an agent or factor for transacting business �or another. <Citing Words and Phrases, Volume 7A, page 558> Commissions when used to express compensation for services rendered, it usually denotes a percentage on the amount of money paid out or received (ibid page 559) The word commission is usually employed to mean the compensation to an agent, broker or person who handles the affairs of others in payment for their services <ibid 559). 604

DEC I S I 0 N- C.T.A. Case No. 4589 -9 - From the definitions cited above, the foreign remittances given to Manila Branch fall squarely within the definition of a commission. In the instant case, petitioner laid out the nature of the transactions as involving two types. One, is where Marubeni Japan is itself the buyer or seller in a transaction, with a counterpart buyer or seller in the Philippines; and the other is where the Marubeni Head Office is neither the buyer nor the seller, there being Philippine buyers or sellers and counterpart foreign buyers or sellers. In both types of transactions, there was alleged to be active participation by Marubeni � Branch by obtaining information, arranging for shipment, communicating and negotiating the terms and conditions with the Philippine parties involved, and other liaison services. It was shown that Marubeni Head Office was itself the seller or the buyer in this activity in the Philippines. The role of the branch involved facilitation of the said transaction. For this it received "commissions from Home Office" amounting to ~22,031,993.00. The second type of transaction was shown as one where petitioner was not a buyer or seller there being Philippine buyers or sellers and counterpart foreign buyers or sellers. The participation of the branch in this transaction also involved liaison service and the commission paid to it represents all income allocated to it by the Head Office. Moreover, the Court sustains its deviation from the ca1e of Philipp Brothers Oceanic Inc. v~. Commissioner of Internal Revenue, etA Case No. 3140 605 (

DEC I S I 0 N- C.T.A. Case No. 4589 - 10 - with the case at bar based on the �ollowing considerations: In the Philipp Brothers Oceanic case, the amount o� Commissions allocated to the Philippine Branch is not dictated by the amount, bulk, quantity or volume o� the import and/or export transaction. It is based on a uni�orm Intercompany Commission schedule supplied by the Head O��ice. Secondly~ instead o� subsidy the term used is Commission intercompany, and the amount o� Commission is based on a pre-determined rates. Lastly, the Commissions paid by the Head O��ice <PhiBro New York> to Philippine B~anch in the �orm o� �oreign remittances are paid only a�ter the latter has submitted a debit memo. <Philipp Brothers Oceanic, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 3140, p. 80 CTA Records>" Clearly then, the questioned assessment is in order. WHEREFORE, the decision o� the Commissioner o� Internal Revenue assessing petitioner the amount o� ~2,134,871.23 is SUSTAINED. SO ORDERED. GRUBA Judge 606

DEC I S I 0 N- C.T.A. Case No. 4589 - 11 - WE CONCUR: iding Judge ~- fc~~ RAftON 0. DE VE A Associate Ju ge CERTIFICATION I hereby certi�y that this decision was reached a�ter due consultation among the members o� the Court o� Tax Appeals in accordance with Section 13, Article VIII o� the Constitution. c_....~.G.~ ERNESTO D. ACOSTA Presiding Judge Court o� Tax Appeals ' 607