BIR Ruling [DA-078-06]

March 6, 2006 BIR RULING [DA-078-06] Sec. 105 of the Tax Code BIR Ruling 170-02; ITAD-187-02 Aranas Consunji Barleta Law Office Unit 106, Le Metropole Bldg. 326 Tordesillas Cor. Dela Costa Sts. Salcedo Village, Makati City Attention: Jesus Clint O . Aranas Partner This refers to your letter dated January 12, 2006 requesting on behalf of your client, Epson Precision (Phils.), Inc. (EPPI), confirmation of the following: 1. The sale of LCD Modules by Epson Singapore to Epson Precision Philippines, Inc. is exempt from the value added tax; 2. Business profits from the sale of the LCD Modules by Epson Singapore, under a proposed Just In Time Arrangement ("JIT") between them shall not be taxable in the Philippines. It is represented that Epson Precision Philippines Inc. (hereinafter EPPI) is a Philippine Economic Zone Authority (PEZA) registered enterprise; that in order to adequately manage the inventory level of raw materials to be purchased from Epson Singapore (hereinafter "ESP"), its non resident foreign supplier, EPPI intends to enter into a "Just In Time Arrangement" with the latter; that under this arrangement, the goods will be delivered to EPPI from the warehouse of Sanyo Epson Imaging Devices (Phils) Inc. (SEPH), a resident corporation, just in time and only when needed for the manufacture of the liquid crystal display; that it is only upon delivery of the goods to EPPI will ESP recognize a sale; that as such, SEPH will maintain the stock of goods owned by ESP, solely for the purpose of storage and delivery; and that ESP will only recognize sales and will issue invoice upon actual delivery of goods to EPPI by SEPH, just in time and when needed for production purposes. It is further represented that the said LCD Modules were purchased by Epson Singapore from Sanyo Epson Imaging Devices (Japan), which goods are located in the Philippines for delivery to EPPI. In reply, please be informed that the sale of LCD modules by Epson Singapore to EPPI is exempt from value added tax. In BIR Ruling No. 170-02, the BIR ruled as follows: "Since the goods (located in the Philippines) to be sold by Intel Corporation (IC) to Intel Semiconductor Limited (ISL), both non-residents (US), will ultimately be sold to PEZA-registered enterprises located in the ECOZONES, whose sales are destined for export to foreign countries, the sales of IC to ISL and the sales by ISL to PEZA-registered enterprises, under the said proposed sale structure, shall be exempt from VAT." Considering that the seller is a non-resident and the buyer is a PEZA locator which by legal fiction is considered as a foreign country, then the said sale is not within the Philippine VAT law. On the issue of the just in time arrangement, it is confirmed that residents of Singapore shall not be deemed to have a permanent establishment (PE) or be deemed to be doing business in the Philippines by storing goods in the warehouse maintained by SEPH and subsequently selling the same to EPPI upon delivery of the goods under a just in time arrangement. Article 7 of the RP-Singapore tax treaty states that: "BUSINESS PROFITS "1. The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is attributable to that permanent establishment" Article 5 of the RP-Singapore tax treaty states as follows: "PERMANENT ESTABLISHMENT "1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business in which the business of the enterprise is wholly or partly carried on. "2. The term 'permanent establishment' includes specially but is net limited to: xxx xxx xxx g) A warehouse, in relation to a person providing storage facilities for others; xxx xxx xxx" Based on the afore-quoted provisions of the Philippines' tax treaty with Singapore, the business profits of ESP shall be taxable in the Philippines only if it has a permanent establishment situated in the Philippines and only so much of them as is attributable to that permanent establishment. The arrangement whereby ESP maintains a stock of goods in the warehouse of SEPH solely for the purpose of storage and delivery to EPPI just in time and when needed for production purposes was proposed in order for EPPI to be able to effectively eliminate the stocking of inventory, reduce order scheduling and eliminate excess material spoilage. Moreover, through this arrangement, EPPI shall likewise be able to reduce production and delivery lead times, manufacturing related costs through the elimination of excess material handling, inspections, and storage of parts and eliminate the use of warehouse. TaHIDS As such, it is clear that the use of the warehouse is for the benefit of EPPI and not for the purpose of establishing a fixed place through which the business of ESP is to be wholly or partly carried on. Such being the case, the warehouse should not be considered a permanent establishment of ESP. In view of the foregoing, the business profits to be derived by ESP in the Philippines from the sale of the LCD Modules to EPPI are not taxable in the Philippines since ESP does not maintain a permanent establishment in the Philippines to which its profits as such may be attributed. In ITAD Ruling No. 187-02 dated October 22, 2002 , the BIR was requested to resolve whether foreign suppliers under a proposed delivery and sales arrangement are deemed to have a permanent establishment (PE) in the Philippines or are deemed to be doing business in the Philippines for storing goods in a warehouse maintained by a PEZA registered entity and subsequently selling the same upon withdrawal therefrom and whether the sale of goods by the foreign suppliers to the owner of the warehouse is a taxable transaction in the Philippines. The BIR held: "Based on the aforequoted provisions of the Philippines' tax treaties with US, Singapore, Korea and Japan, the business profits of the foreign suppliers of TIP shall be taxable in the Philippines if they have a permanent establishment situated in the Philippines and only so much of them as is attributable to that permanent establishment. A warehouse is considered a permanent establishment if the business of an enterprise of one of the Contracting States is wholly or partly carried on through it. In the instant case, the subject warehouse is being utilized by its owner, TIP, for storing raw materials delivered to the latter by foreign suppliers in accordance with the Just-In-Time (JIT) arrangement as proposed by TIP. xxx xxx xxx Based on this arrangement, it is clear that the use of the warehouse is for the benefit of TIP and not for the purpose of establishing a fixed place through which the business of the foreign suppliers are to be wholly or partly carried on. If any, the relation between the warehouse and the foreign suppliers under the arrangement is merely to attain the ultimate objective of carrying out the JIT proposal of TIP." xxx xxx xxx "In fine, herein foreign suppliers pursuant to the proposed delivery and sales arrangement with TIP who are residents of Japan, Korea, Singapore and US are exempt from Philippine income tax. On the other hand, similar suppliers who are residents of Hongkong and Taiwan will be taxed as non-resident foreign corporations under Section 28(B)(1) of the NIRC of 1997 as the Philippines has no existing tax treaties with Hongkong and Taiwan. Nonetheless, the sale of goods to TIP by these foreign suppliers, whether residents of tax treaty partner countries or not, are exempt from the value added tax. All the above considered, BIR Ruling No. 172-99 is hereby revoked." Accordingly, it is hereby confirmed that: 1. The sale of LCD Modules by Epson Singapore to Epson Precision Philippines Inc. is exempt from the value added tax; 2. Business profits from the sale of the LCD Modules by Epson Singapore, under a proposed Just In Time Arrangement ("JIT") between them shall not be taxable in the Philippines. TaISDA This ruling is being issued on the basis of the facts as represented. If upon investigation it is disclosed that the facts are different from that represented, then this ruling shall be null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Asst. Commissioner Legal Service