Revenue Regulation 1-79

SECTION 1. Scope. — These amended regulations shall govern the manner of taxation of non-resident
citizens as provided for under Section 21 of the Tax Code, as amended, and shall be known as Revenue
Regulations No. 1-79.

In reply, please be informed that KAI's Filipino employees who were sent to work in HongKong may either be
permanent or contractual. They are considered permanent if they leave the Philippines to reside abroad on a
more or less permanent basis, (whether or not his stay abroad is less than 183 days); and contractual if they
leave the Philippines on account of a contract of employment which is renewed from time to time within or during
the taxable year under such circumstances as to require him to be physically present abroad most of the time
during the taxable year, which means staying abroad for not less than 183 days during the taxable year. (Sec. 2,
Revenue Regulations No. 1-79 dated January 8, 1979; BIR Ruling No. 043-89)

Permanent or contractual employees (who stayed abroad for not less than 183 days during the taxable
year) shall be considered non-resident citizen with respect to the income derived in HongKong, which means
that such income shall be subject to the preferential tax rate on the adjusted gross income pursuant to Section
21(b) of the Tax Code. Likewise, Filipinos who are already residents of HongKong when hired by KAI shall be
considered non-resident citizens subject to Philippine income tax under Section 21(b) of the Tax Code and to the
withholding tax on compensation of a citizen for services performed outside the Philippines under Section 7.11 of
Revenue Regulations No. 6-82. (BIR Ruling No. 503-88) Contractual Filipino employees of KAI whose stay
abroad is less than 183 days shall be taxable as resident subject to the graduated income tax rate under Section
21(a) of the Tax Code.

In reply, please be informed that Section 2 of Revenue Regulations No. 1-79 dated January 8, 1979
implementing Section 21(b) of the Tax Code, as amended define permanent employee as compared to that of a
contract worker, as follows:

In view thereof, this Office is of the opinion as it hereby holds that your employees who are deployed in Beijing to
assume various positions at the Palace Hotel under and by virtue of a joint venture agreement with the owners
thereof shall be considered contractual employees. Accordingly, in order to be considered as a non-resident
citizen subject to the preferential tax rate prescribed under Section 21(b) of the Tax Code, they shall be required
to show proof of physical presence abroad for a period of at least 183 days reckoned from the date he actually
departed from the Philippines as required under Revenue Regulations No. 1-79.

In reply thereto, I have the honor to inform you that your question is answered in the negative. Section 2 of
Revenue Regulations No. 1-79 amplifying Section 20(c)(1) and (2) of the Tax Code defines the term "non-
resident citizen" as one who establishes to the satisfaction of the Commissioner of Internal Revenue the fact of
his physical presence abroad with the definite intention to reside therein and shall include any Filipino who
leaves the country during the taxable year as:

In view thereof, and considering that your wife is travelling on a tourist visa and that she does not have any
permanent residence abroad, this Office is of the opinion as it hereby holds that your wife is not a non-resident
citizen within the contemplation of Section 20(e)(1) and (2) of the Tax Code as implemented by Revenue
Regulations No. 1-79.

3. Businessmen and professional practitioners staying abroad as holders of immigrant visas are considered
non-resident citizens, even if such stay is less than 183 days. The requirement of having stayed outside the
Philippines for not less than 183 days during a taxable year applies only in the case of a contract worker in order
to be considered physically present abroad most of the time during the taxable year [Sec. 2(c), Revenue
Regulations No. 1-79].

However, pursuant to Revenue Regulations No. 8-76 as amended implementing Section 77 of the Tax Code, the
Payor corporation is required to render an information return (BIR Form 1701B) on the remittances made in a
calendar year to non-resident Filipino citizens of dividends in the aggregate amount of P1,800.00 or more. Since
said dividends constitute income derived from sources within the Philippines, (Sec. 37 (a)(2)(A), Tax Code), the
Filipino recipients thereof who are residing abroad must file income tax returns on BIR Form No. 1701 or 1701A,
as the case may be, declaring therein said dividends. They shall also filed separate income tax returns on BIR
Form No. 1701 covering income derived from foreign sources. (Sec. 4, Revenue Regulations No. 1-79 dated
January 8, 1979).

Accordingly, you are considered a non-resident citizen since your services were rendered abroad for
more than 183 days and, therefore, exempt from payment of Philippine income tax. In this connection, the
phrase "most of the time" which is used in determining when a citizen's physical presence abroad will qualify him
as non-resident, shall mean that the said citizen shall have stayed abroad for at least 183 days in a taxable year
[Section 2 (c), Revenue Regulations No. 1-79].

Moreover, beginning February 13, 2006 up to the present, you may still be considered a non-resident citizen if
your services were rendered abroad for more than 183 days in each of the years 2006 and 2007 and, therefore,
exempt from payment of Philippine income tax. In this connection, the phrase "most of the time" which is used in
determining when a citizen's physical presence abroad will qualify him as non-resident, shall mean that the said
citizen shall have stayed abroad for at least 183 days in a taxable year [Section 2 (C), Revenue Regulations No.
1-79].

Thus, for purposes of exemption from income tax, a citizen must be deriving foreign-sourced income for
being a non-resident citizen under Section 23(C) of the Tax Code of 1997 or for being an overseas contract
worker (OCW) under Section 23(B) of the same Code. Accordingly, the issue on whether or not you are a non-
resident citizen depends on whether your services are rendered abroad for more than 183 days in which case
said services are exempt from Philippine income tax. In this connection, the phrase "most of the time" which is
used in determining when a citizen's physical presence abroad will qualify him as non-resident, shall mean that
the said citizen shall have stayed abroad for at least 183 days in a taxable year (Section 2(c), Revenue
Regulations No. 1-79).

Thus, for purposes of exemption from income tax, a citizen must be deriving foreign-sourced income for being a
non-resident citizen under Section 23(C) of the Tax Code of 1997 or for being an overseas contract worker
(OCW) under Section 23(B) of the same Code. You may be considered a non-resident citizen since your
services are rendered abroad for more than 183 days and are therefore exempt from payment of Philippine
income tax. In this connection, the phrase "most of the time" which is used in determining when a citizen's
physical presence abroad will qualify him as non-resident, shall mean that the said citizen shall have stayed
abroad for at least 183 days in a taxable year [Section 2(c), Revenue Regulations No. 1-79].
REVENUE REGULATIONS NO. 10-98 issued September 2, 1998 prescribes the regulations to implement RA
No. 8424 relative to the imposition of income taxes on income derived under the Foreign Currency Deposit and
Offshore Banking Systems. Specifically, interest income which is actually or constructively received by a resident
citizen of the Philippines or by a resident alien individual from a foreign currency bank deposit will be subject to a
final withholding tax of 7.5%. The depository bank will withhold and remit the tax. If a bank account is jointly in
the name of a non-resident citizen, 50% of the interest income from such bank deposit will be treated as exempt
while the other 50% will be subject to a final withholding tax of 7.5%. The Regulations will apply on taxable
income derived beginning January 1, 1998 pursuant to the provisions of Section 8 of RA 8424. In case of
deposits which were made in 1997, only that portion of interest which was actually or constructively received by
a depositor starting January 1, 1998 is taxable.

REVENUE REGULATIONS NO. 8-98 issued September 2, 1998 amends pertinent portions of Revenue
Regulations Nos. 11-96 and 2-98 relative to the tax treatment of the sale, transfer or exchange of real property.
Specifically, the Capital Gains Tax (CGT) Return will be filed by the seller within 30 days following each sale or
disposition of real property. Payment of the CGT will be made to an Authorized Agent Bank (AAB) located within
the Revenue District Office (RDO) having jurisdiction over the place where the property being transferred is
located. Creditable withholding taxes, on the other hand, deducted and withheld by the withholding agent/buyer
on the sale, transfer or exchange or real property classified as ordinary asset will be paid by the withholding
agent/buyer upon filing of the return with the AAB located within the RDO having jurisdiction over the place
where the property being transferred is located. Payment will have to be done within 10 days following the end of
the month in which the transaction occurred, provided, however, that taxes withheld in December will be filed on
or before January 25 of the following year.

REVENUE REGULATIONS NO. 13-99 issued September 14, 1999 prescribes the regulations for the exemption
of a citizen or a resident alien individual from the payment of the 6% Capital Gains Tax on the sale, exchange or
disposition of his principal residence. In order for a person to be exempted from the payment of the tax, he
should submit, together with the required documents, a Sworn Declaration of his intent to avail of the tax
exemption to the Revenue District Office having jurisdiction over the location of his principal residence within
(30) days from the date of the sale, exchange or disposition of the principal residence. The proceeds from the
sale, exchange or disposition of the principal residence must be fully utilized in acquiring or constructing the new
principal residence within eighteen (18) calendar months from the date of the sale, exchange or disposition. In
case the entire proceeds of the sale is not utilized for the purchase or construction of a new principal residence,
the Capital Gains Tax will be computed based on the formula specified in the Regulations.

If the seller fails to utilize the proceeds of sale or disposition in full or in part within the 18-month reglementary
period, his right of exemption from the Capital Gains Tax did not arise on the extent of the unutilized amount, in
which event, the tax due thereon will immediately become due and demandable on the 31st day after the date of
the sale, exchange or disposition of the principal residence.

If the individual taxpayer's principal residence is disposed in exchange for a condominium unit, the disposition of
the taxpayer's principal residence will not be subjected to the Capital Gains Tax herein prescribed, provided that
the said condominium unit received in the exchange will be used by the taxpayer-transferor as his new principal
residence.

REVENUE REGULATIONS NO. 14-2000 issued December 29, 2000 amends Sections 3(2), 3 and 6 of RR No.
13-99 relative to the sale, exchange or disposition by a natural person of his "principal residence".

The residential address shown in the latest income tax return filed by the vendor/transferor immediately
preceding the date of sale of said real property shall be treated, for purposes of these Regulations, as a
conclusive presumption about his true residential address, the certification of the Barangay Chairman, or
Building Administrator (in case of condominium unit), to the contrary notwithstanding, in accordance with the
doctrine of admission against interest or the principle of estoppel.

The seller/transferor's compliance with the preliminary conditions for exemption from the 6% capital gains tax
under Sec. 3(1) and (2) of the Regulations will be sufficient basis for the RDO to approve and issue the
Certificate Authorizing Registration (CAR) or Tax Clearance Certificate (TCC) of the principal residence sold,
exchanged or disposed by the aforesaid taxpayer. Said CAR or TCC shall state that the said sale, exchange or
disposition of the taxpayer's principal residence is exempt from capital gains tax pursuant to Sec. 24 (D)(2) of the
Tax Code, but subject to compliance with the post-reporting requirements imposed under Sec. 3(3) of the
Regulations.
BIR RULING NO. 317-92

In reply thereto, I have the honor to inform you that to constitute a "joint venture" certain factors are essential:
1. each party to the venture must make a contribution, not necessarily of capital, but by way of services,
skill, knowledge, material or money;
2. profits must be shared among the parties;
3. there must be a joint proprietary interest and right of mutual control over the subject matter of the
enterprise;
4. usually, there is single business transaction rather than a general or continuous transaction" (Words and
Phrases, Vol. 23, p. 230)

Likewise, a joint venture was created when two corporations while registered and operating separately were
placed under one sole management which operated the business affairs of said companies as though
constituted a single entity thereby obtaining substantial economy and profits in the operation (Collector vs.
Batangas Transportation et al. 102 Phil. 822; See also BIR Ruling Nos. 020(b)-020-80-187-82 dated June 3,
1982; 24-000-00-115-86 dated July 17, 1986; 069-90 dated May 9, 1990 and 254-91 dated November 26, 1991).

The Memorandum of Agreement entered into by and between ALI and API in 1990 providing for the
construction of the aforementioned office tower has not by itself created a taxable joint venture. However, the
joint venture to be subsequently entered into by and between ALI and API, for the leasing of the Building floors or
portions thereof separately owned by them will create, a joint venture subject to tax under Section 24(a) of the
Tax Code, as amended, separate and distinct from ALI and API.

Moreover, the rentals to be received by the joint venture from the tenants in the Building are income to the
joint venture. Furthermore, the distribution by the joint venture of its net income to ALI and API are in the nature
of dividends which are not subject to tax under Section 24(e)(4) of the Tax Code, as amended.
This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation
the same could not be substantiated then this ruling shall be considered null and avoid.
REVENUE REGULATIONS NO. 9-98 issued September 2, 1998 prescribes the regulations to implement RA No.
8424 relative to the imposition of the Minimum Corporate Income Tax (MCIT) on domestic corporations and
resident foreign corporations. Specifically, an MCIT of 2% of the gross income as of the end of the taxable year
is imposed upon any domestic corporations beginning the 4th taxable year immediately following the taxable
year in which such corporation commenced its business operations. The MCIT will be imposed whenever such
operation has zero or negative taxable income or whenever the amount of MCIT is greater than the normal
income tax due from such operation. In the case of a domestic corporation whose operations or activities are
partly covered by the regular income tax system and partly covered under a special income tax system, the
MCIT will apply on operations covered by the regular income tax system.

The Regulations will apply to domestic and resident foreign corporations on their aforementioned taxable income
derived beginning January 1, 1998 pursuant to the pertinent provisions of RA 8424, provided, however, that
corporations using the fiscal year accounting period and which are subject to MCIT on income derived pertaining
to any month or months of the year 1998 will not be imposed with penalties for late payment of the tax.
RR 10-76

SUBJECT : Regulations governing taxation of Offshore Banks and Foreign Currency Deposit Units
of depository banks established under P.D. 1034 and 1035, respectively
TO : All Internal Revenue Officers and Others Concerned

SECTION 1. Scope. — Pursuant to Section 338 of the National Internal Revenue Code, as amended, the
following regulations are hereby promulgated to govern the manner of taxation of offshore banks and the
expanded Foreign Currency Deposit Units of depository banks established under Presidential Decrees No. 1034
and 1035, respectively. These regulations shall be known as Revenue Regulations No. 10-76.

SECTION 2. Definition of Terms. —

a. "Offshore Banking" shall refer to the conduct of banking transactions in foreign currencies involving
the receipt of funds principally from external sources and the utilization of such funds as provided in
Presidential Decree No. 1034.

b. "Offshore Banking Unit" hereinafter referred to as OBU, shall mean a branch, subsidiary or affiliate of
a foreign banking corporation which is duly authorized by the Central Bank of the Philippines, as a
separate accounting unit, to transact offshore banking business in the Philippines in accordance with
the provisions of P.D. 1034 as implemented by Central Bank Circular No. 546.

c. "Deposits" shall mean funds in foreign currencies which are accepted and held by an off-shore
banking unit in the regular course of business, with the obligation to return an equivalent amount to
the owner thereof, with or without interest.

d. "Resident" shall mean —

(1) an individual citizen of the Philippines residing therein; or
(2) an individual who is not a citizen of the Philippines but is permanently residing therein; or
(3) a corporation or other juridical person organized under the laws of the Philippines.
(4) a branch, subsidiary, affiliate, extension office or any other unit of corporations or juridical persons
organized under the laws of any foreign country operating in the Philippines.

d. "Non-resident" shall mean an individual, corporation or other juridical person not included in the
above definition of "residents".

e. "Foreign Currency Deposit Unit" (FCDU) shall mean an accounting unit or department in a local
bank or in an existing local branch of foreign banks, which is authorized by the Central Bank of the
Philippines to operate under the expanded foreign currency deposit system, in accordance with the
provisions of P.D. 1035, as implemented by Central Bank Circular No. 547. The FCDU authority shall
be distinguished from the authority to accept foreign currency deposits under R.A. No. 6426, as
implemented by Central Bank Circular No. 343.

f. "Gross offshore income" shall mean all income arising from transactions allowed by the Central
Bank of the Philippines conducted by and between —

1) in the case of an offshore banking unit with another offshore banking unit or with an expanded Foreign
Currency Deposit unit or with a non-resident;
2) in the case of an expanded Foreign Currency Deposit Unit with another expanded Foreign Currency
Deposit Unit or with an Offshore Banking Unit or with a non-resident.

g. "Gross onshore income" shall mean gross interest income arising from foreign currency loans and
advances to and/or investments with residents made by Offshore Banking Units or expanded
Foreign Currency Deposit Units. Such gross interest income shall include all fees, commissions and
other charges which are integral parts of the income from the above transactions. Cdta

SECTION 3. Rates of income tax to be imposed. —

The rates or income tax to be imposed, which shall be in lieu of all other taxes such as, but not limited to
privilege tax, gross receipts tax, documentary and science stamp tax and profit remittance tax, are as followers:

(a) On offshore income, there shall be imposed an income tax of five percent (5%) based on net offshore
income as computed in Section 4. cdtai
Income realized by offshore banking units on transactions with local commercial banks including branches of
foreign banks that may be authorized by the Central Bank of the Philippines to transact business with offshore
banking units shall likewise be subject to the same tax, except net income from such transactions as may be
specified by the Secretary of Finance, upon recommendation of the Monetary Board, to be subject to the usual
income tax payable by banks.

(b) In the case of gross onshore income as defined in Section 2(h) above, the tax shall be ten percent (10%)
thereof and shall be a final tax.

(c) Income not covered by paragraphs (a) and (b) above shall be subject to the usual corporate taxes
imposed by the National Internal Revenue Code, as amended.

SECTION 4. Manner of computation of net income. —

(a) Net offshore income for purposes of Section 3, paragraph (a) above, shall be the amount remaining after
deducting from the gross offshore income during the taxable year the following items:
1) the proportion of total interest expenses for the same period based on the ratio of offshore interest
income which bears to the total gross interest income;
2) the proportion of general administrative expenses based on the ratio of net offshore income which bears
to the total net income after deducting only interest expenses mentioned in sub-paragraph (1) above.
3) Likewise, there shall be allowed a reasonable amount of head office expenses in accordance with the
ratio specified in sub-paragraph (2) above.

(b) In the case of onshore income, the gross interest income without the benefit of any deduction
corresponding to the allocable onshore income, shall be the amount upon which the ten percent (10%)
withholding income tax shall be computed.

SECTION 5. Manner of filing returns and payment of taxes. —

Within sixty (60) days after the end of each of the first three quarters of the calendar or fiscal year.
(a) for offshore income and other income mentioned In Section 3(c) —
a return of net taxable offshore income shall be filed with, and the tax due thereon paid, to the Commissioner of
Internal Revenue, Revenue Regional Director, Revenue District Officer or the Collection Agent of the City or
Municipality where the corporation's principal office is located and where its books of accounts and other data
from which the return is prepared are kept, by every offshore banking units and expanded Foreign Currency
Deposit Units, regardless of whether there is tax due or not. For these purposes, B.I.R. Form No. 17.02-Q shall
be used and the appropriate rates, as enumerated in Section 3 above, shall be applied accordingly.

(b) for onshore income —

in the case of onshore income realized by an offshore banking unit or by an expanded Foreign Currency Deposit
Unit, the income need not be included in the quarterly income tax return to be filed as required above as the
payor-borrower under Section 53, in relation to Section 54, of the National Internal Revenue Code, is constituted
as the withholding agent charged with the obligation of deducting, withholding and remitting to the Commissioner
of Internal Revenue the income tax due thereon within the period prescribed by law with the appropriate return in
accordance with existing revenue and Central Bank regulations.

A copy of the quarterly return filed, together with the copy of the official receipt denoting payments
thereon, shall be furnished direct to the offshore banking unit or foreign currency deposit unit concerned, which
shall in turn submit to the Bureau of Internal Revenue said documents accompanied by statement showing a list
of all its domestic borrowers, amount borrowed and interest income thereon. The statement with its attachments,
shall be filed together with the quarterly return required above.

A final consolidated return or an adjustment return on B.I.R. Form 1702 covering the total taxable onshore and
offshore income for the preceding calendar or fiscal year shall be filed on or before the 15th day of the fourth
month following the close of the calendar or fiscal year.
 The return shall include all the items of gross income and deductions for the whole taxable year. The tax
shown on the final or adjustment return, after deducting therefrom the quarterly income taxes paid and withheld
during the preceding three quarters of the same taxable year, shall either be paid upon filing, or refunded as the
case may be.

SECTION 6. Statement to be attached to the return. —

There shall be attached to the final consolidated return or adjustment return of the taxpayer for such taxable year
a sworn statement, a specimen form of which is hereto attached, by a responsible officer setting forth in
summarized form the pertinent information required by these regulations with respect to the computation of the
net offshore income, gross onshore income and taxes paid or withheld.

SECTION 7. Records to be kept. —

Every offshore banking unit, as well as expanded Foreign Currency Deposit Unit, which is duly authorized by the
Central Bank of the Philippines to transact offshore banking business in the Philippines shall maintain books of
account which shall be kept in the place of its principal place of business for inspection.
In addition, all the supporting data which were used in compiling the summary statement required to be attached
to the income tax returns to be filed as prescribed under Section 6 hereof must likewise be made readily
available at its principal place of business.

SECTION 8. Income of non-resident. —

Any income of non-residents from transactions with either an offshore banking unit or with an expanded Foreign
Currency Deposit Unit shall be exempt from any and all taxes.

SECTION 9. Income of foreign personnel. —

There shall be levied, collected and paid for each taxable year upon the gross income received by every alien
individual employed by offshore banking units in the Philippines as salaries, wages, annuities, compensations,
remunerations and emoluments from such offshore banking units a tax equal to fifteen (15%) percent of such
gross income. The aforesaid tax shall be deducted and withheld at source in the same manner and condition as
that provided under Supplement "A" — Withholding on Wages of Commonwealth Act No. 466, as amended.

SECTION 10. Privileges of the offshore banking units. —

The offshore banking units shall be exempt from all forms of local licenses, fees, dues, imposts or any other local
taxes or burdens.
The license fee paid by offshore banking units shall be allowed as a deduction in accordance with Section 4 of
these regulations.

SECTION 11. Registration. —

Offshore a Banking Units and expanded Foreign Currency Deposit Units shall, upon receipt of advice from the
Central Bank, register with the Bureau of Internal Revenue its business name for the purpose of —
a. registering its trade name;
b. registering as an employer pursuant to the provision of R. A. 466;
c. registering its name for the purpose of securing its taxpayer account number (TAN).
RR 14-77

TO : All Internal Revenue Officers and others Concerned

Pursuant to Section 338 of the National Internal Revenue Code as amended, the following regulations
are hereby promulgated to amend certain sections of Revenue Regulations No. 10-76.

SECTION 1. Section 2(h) is hereby amended to read as follows:

"SEC. 2(h). Gross onshore income shall mean gross interest income arising from foreign currency
loans and advances to and/or investments with residents made by offshore banking units or expanded
foreign currency deposit units. In the case of foreign currency loan transactions, such gross interest
income shall refer only to the stipulated interest and shall not include any and all fees, commissions and
other charges which are integral parts of the income from the above transactions." Cdt

SECTION 2. Section 3(b) is hereby amended to read as follows:

"SEC. 3(b). In the case of gross onshore income as defined in Section 2(h) above, the tax shall be ten
percent (10%) thereof and shall be a final tax. Any and all fees, commissions and other charges which
are integral parts of the charges imposed on foreign currency loan transactions are exempt from the tax
herein imposed."

SECTION 3. Section 5(b) is hereby amended to read as follows:

"SEC. 5(b). For onshore income — In the case of onshore income realized by an offshore banking
unit or by an expanded Foreign Currency Deposit Unit, the income need not be included in the
quarterly income tax return to be filed as required above as the payor-borrower under Section 53, in
relation to Section 54, of the National Internal Revenue Code, is constituted as the withholding agent
charged with the obligation of deducting, withholding and remitting to the Commissioner of Internal
Revenue the income tax due thereon within the period prescribed by law with the appropriate return in
accordance with existing revenue and Central Bank regulations. Regardless, therefore, of whether the
accounting method of an OBU-creditor in cash or accrual basis, the withholding tax will be withheld
and remitted only after the due date of payment of the interest incurred by an onshore borrower.

SECTION 4. Effectivity. — This regulation shall apply to income received beginning with taxable
year starting after January 1, 1977.
 RMO 63-99
SUBJECT : Determination of Taxable Income on Inter-company Loans or Advances applying Section 50 of the NIRC, as
Amended

TO : All Revenue Officers Concerned

1. Objectives:

1.1 To adopt the arm's length bargaining standard as the ultimate test for determining the correct gross income and deductions between
two or more enterprises under common control.

1.2 To provide a means of redistributing or reapportioning income and expenses of taxpayers under common control after applying Section
50 of the NIRC, as amended.

2. Coverage: This paper applies to all forms of bona fide indebtedness and includes:

2.1 Loans or advances of money or other consideration (whether or not evidence by a written instrument);
2.2 Indebtedness arising in the ordinary course of business out of sales, leases, or the rendition of services by or between members of the
group, or any other similar extension;
2.3 But does not apply to alleged indebtedness which was in fact a contribution of capital or a distribution by a corporation with respect to
its shares.

3. Applying Arm's Length on Section 50 of the NIRC, as amended

3.1 Section 50. Allocation of income and deductions. — In any case of two or more organizations, trades, or businesses (whether or not
incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the
Commissioner of Internal Revenue is authorized to distribute, apportion, or allocate gross income or deductions between or among such
organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent
evasion of taxes or clearly to reflect the income of any such organizations, trades or businesses.
3.2 Section 50 empowers the Commissioner to rectify abnormalities and distortions in income brought about by common control through
the adoption of standards considered fair, reasonable or at arm's length.
3.3 This Order adopts the arm's length bargaining standard as the ultimate test for determining the fairness of related party transactions -
i.e., "the standard to be applied in every case is that of an uncontrolled taxpayer dealing at arm's length with another uncontrolled taxpayer".

4. Determination of Taxable Income on Inter-company Loans or Advances

4.1 In general. Where one member of a group of controlled entities makes a loan or advances directly or indirectly, or otherwise becomes a
creditor of another member of such group, and charges no interest, or charges interest at a rate which is not equal to an arm's-length rate as
defined in subparagraph (2) of this paragraph, the Commissioner may make appropriate allocations to reflect an arm's length interest rate for
the use of such loan or advance.

4.1.1If payments are made to parties under common control according to a legally enforceable contract, the contract may still be recognized
as valid. However, for purposes of determining the true taxable income of the parties involved, the interest rate charged may be subjected to
reallocation.
4.1.2Section 50 does not apply only to taxable entities. Reallocation may also apply to tax-exempt organizations.

4.2 Arm's Length interest rate.

4.2.1In general. For purposes of this Order, the arm's length interest rate shall be the rate of interest which was charged or would have been
charged at the time the indebtedness arose in independent transaction with or between unrelated parties under similar circumstances. All
relevant factors will be considered, including the amount and duration of the loan, the security involved, the credit standing of the borrower,
and the interest rate prevailing at the situs of the lender or creditor for comparable loans.
4.2.2For purposes of determining the arm's length rate in domestic transactions, the interest rate to be used is the Bank Reference Rate
(BRR) prescribed by the Bangko Sentral ng Pilipinas (BSP).
4.2.3The fact that the interest rate actually charged on a loan or advance is expressly indicated on a written instrument does not preclude the
application of Section 50 to such loan or advance.

5. Interest Period

5.1 The interest period shall commence at the date the indebtedness arises, except that with respect to indebtedness arising in the ordinary
course of business out of sales, leases, or supply of goods and services which are generally considered as trade accounts receivables or
payables, the interest period shall not commence if the taxpayer is able to establish that the normal trade practice in a given industry is to
allow balances, in the case of similar transactions with unrelated parties, to remain outstanding for a longer period without charging interest.
5.2 For purposes of determining the period of time for which a balance is outstanding, payments or credits shall be applied against the
earliest balance outstanding. The taxpayer may, in accordance with an agreement, apply such payments or credits in some other order in its
books only after establishing that the arrangement is customary for parties in that particular business.

6. Effectivity
This Order shall take effect immediately.

(SGD.) BEETHOVEN L. RUALO

Commissioner of Internal Revenue