SEC-OGC Opinion No. 23-05: Allowable Activities of a Representative Office

The Securities and Exchange Commission (“SEC”) issued SEC-OGC Opinion No. 23-05 on 15 March 2023 (“Opinion”) which clarifies that a representative office is not allowed to receive payments on behalf of the parent company because it is not one of the allowable activities of a representative office under the Foreign Investment Act (“FIA”) or its Implementing Rules and Regulations (“FIA-IRR”). 

The Opinion stems from a query presented by CTI Engineering International Co., Ltd. – Manila Liaison Office (“CTII-Manila”). CTII-Manila operates on behalf of its parent company, CTI Engineering International Co. Ltd. (“CTII-Japan”), a foreign company duly licensed to transact business in the Philippines. 

CTII-Manila was established as a representative office in Manila “to act as a liaison between its head office and its clients/customers in the Philippines.” CTII-Manila’s operations are fully subsidized by CTII-Japan, and it does not engage in business activities for its own account in the Philippines. Currently, CTII-Japan conducts engineering consultancy services for the Philippine government, its agencies and instrumentalities, and CTII-Manila liaises between the Philippine government and CTII-Japan. 

CTII-Manila sought the opinion of the SEC on whether CTII-Manila is allowed to receive payments on behalf of CTII-Japan from the Philippine government for the services rendered by the former to the latter. 

Nature of a representative office

Section 1(q) of the FIA-IRR defines a representative office as one which 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. It undertakes activities such as but not limited to information dissemination and promotion of the company’s products as well as quality control of products. The Supreme Court has confirmed this definition in the case of Commissioner of Internal Revenue v. Shinko Electric Industries Co. Ltd. where the Court enumerated the characteristics of a representative office, to wit:

1. It is fully subsidized by its head office;
2. It deals directly with the clients of its parent company;
3. It undertakes activities such as but not limited to information dissemination, promotion of the parent company’s products as well as quality control of products; and
4. It does not derive income in the Philippines.  

Allowable activities of a representative office

In explaining the allowable activities of a representative office, the SEC recalled its previous opinions on the matter. In SEC-OGC Opinion No. 15-06, the SEC applied the principle of ejusdem generis when it opined that any permissible act of a representative office should be akin to or resemble the same kind or class as those of information dissemination and promotion of the company’s products, or quality control for the parent company, or any other passive act that does not involve the earning of any income. 

In SEC-OGC Opinion No. 16-20, the SEC opined that “a representative office may only engage in activities which support the business activities of the parent company. In addition, it is imperative that a representative office does not derive income from activities performed in the Philippines. All expenses to establish and maintain the representative office will therefore come from the parent company’s remittances.”

In SEC-OGC Opinion No. 10-01, the SEC emphasized that the activities that may be performed by a representative office are limited only to marketing and promotion of the parent company’s products and services to the Philippine clients, and that all transactions will be booked, sold, or executed outside the Philippines’ jurisdiction, and it will derive no income from within the country. 

Notably, in SEC-OGC Opinion No. 16-20, the SEC specifically mentioned that the act of receiving payment from clients is excluded from a representative office’s passive acts in support of the parent company. 

Given this context, the SEC concluded that a representative office cannot receive payments on behalf of its head office. The SEC noted that the act of receiving payment on behalf of the parent company is not related to information dissemination, promotion, nor quality control. 

Consequently, the SEC opined that CTII-Manila cannot receive payments on behalf of CTII-Japan as this action deviates from the permissible activities outlined in the FIA-IRR.