BIR Ruling [DA-079-06]

March 6, 2006 BIR RULING [DA-079-06] Sec. 106 (A) (2); R.A. 7916 BIR Ruling DA-155-03; DA-048-97; DA-446-99 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, Sanyo Epson Imaging Devices (Phils) Inc . ("SEPH"), for confirmation of your opinion that: 1. The sale of LCD Modules is not subject to income tax considering that SEPH is enjoying the incentive of an Income tax Holiday; 2. The sale of LCD Modules to Sanyo Epson Imaging Devices Japan ("SEID"), for delivery to a resident of the Philippines, is subject to value added tax at zero percent; 3. The subsequent disposition by SEID of the LCD Modules to a resident of Singapore is not subject to Philippine income tax considering that SEID does not have a permanent establishment to which the business profits can be attributable. It is represented that SEPH is a corporation duly organized and existing under the laws of the Philippines; that it is registered with the PEZA as an exporter and is located at 2nd IMI Building, North Science Ave., Bian, Laguna; that it is engaged in the manufacturing business and as such, manufactures goods and wares used in the manufacture of liquid crystal displays, as well as the finished product itself ("LCD Module"); that being a PEZA locator, it exports more than 70% of its inventory, and as such, sells the aforedescribed goods and wares to SEID, which is paid for in acceptable foreign currency; that SEID will subsequently sell the LCD Modules to another non-resident; that however, the LCD Modules will remain in the Philippines for delivery to a designated recipient within a PEZA zone. Income Tax In reply, please be informed that the sale of LCD Modules is not subject to income tax considering that SEPH is enjoying the incentive of an Income tax Holiday. Being exempt from income tax, there is clear basis to argue that income derived from its registered activity is not subject to income tax. In BIR Ruling No. [DA-048-97), the BIR confirmed that: "Based on the foregoing, this Office is of the opinion that SPPI is not subject to income tax, and consequently to the expanded withholding tax on its sale . . . , by virtue of its income tax holiday incentive arising from its registration . . . . (BIR Ruling No. 207-91 dated October 9, 1991; BIR Ruling No. 061-94 dated February 11, 1994)" Value Added Tax Section 106 (A)(2)(a)(2) of the Tax Code treats as an export sale subject to the zero percent VAT rate the sale to a non-resident buyer of raw materials and packaging materials, for delivery to a resident local export oriented enterprise which will be used by the said resident local export oriented enterprise in manufacturing, processing, packing or repacking in the Philippines of the said non-resident buyer's goods and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP) (BIR Ruling No. DA-155-03 dated May 15, 2003) STADIH In the case at bar, the sale to SEID is similarly situated as ruled in the aforementioned ruling where a Philippine resident sold goods to a non-resident for delivery to a Philippine client of the said non-resident. On this basis, we confirm that the sale of LCD Modules by SEPH to SEID is considered zero-rated for VAT purposes pursuant to Section (A)(2)(a)(2) of the Tax Code. Permanent Establishment - Income Tax The taxability of an enterprise residing in Japan with respect to its profits from the sale of goods located in the Philippines shall be governed by the provisions of the RP-Japan Tax Treaty. Article 7 (1) of the RP-Japan Tax Treaty provides: "Article 7 (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." On the basis of the foregoing, the profits of an enterprise residing in Japan shall be taxable in the Philippines only if the enterprise has a permanent establishment (PE) situated in the Philippines but only so much thereof as is attributable to that Philippine PE. Permanent establishment under the RP-Japan are as follows: RP-Japan Tax Treaty : "Article 5 (1) For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. (2) The term "permanent establishment" includes especially: (a) a store or other sales outlet; (b) a branch; (c) an office; (d) a factory; (e) a. workshop; (f) a warehouse; (g) a mine, an oil or gas well, a quarry or other place of extraction of natural resources. (3) A building site or construction or installation project constitutes a permanent establishment only if it lasts more than six months. (4) Notwithstanding the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include: (a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery ; EaTCSA (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; xxx xxx xxx (5) Where a person other than an agent of an independent status to whom paragraph (7) applies is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State in respect of any activities which that person undertakes for the enterprise, if: (a) that person has, and habitually exercises in the first-mentioned Contracting State, an authority to conclude contracts in the name of the enterprise, unless his activities are limited to those mentioned in paragraph (4) which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph; or (b) that person regularly secures orders in the first-mentioned Contracting State wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises which control or are controlled by that enterprise; or (c) that person maintains in the first-mentioned Contracting State a stock of goods or merchandise belonging to the enterprise from which he regularly fills orders on behalf of the enterprise. (6) An enterprise of a Contracting State shall be deemed to have a permanent establishment in the other Contracting State if it furnishes in that other Contracting State consultancy services, or supervisory services in connection with a contract for a building, construction or installation project through employees or other personnel other than an agent of an independent status to whom paragraph (7) applies provided that such activities continue (for the same project or two or more connected projects) for a period or periods aggregating more than six months within any taxable year However, if the furnishing of such services is effected under an agreement between the Governments of the two Contracting States regarding economic or technical co-operation, that enterprise shall, notwithstanding any provisions of this Article, not be deemed to have a permanent establishment in that other Contracting State. (7) An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other Contracting State through a bona fide broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. xxx xxx xxx" Article 5, paragraph (4) of the RP-Japan Tax Treaty, indicates that the maintenance of a stock of goods or merchandise by a Philippine company belonging to Japanese company or the use of facility in the Philippines by a Japanese company solely for purposes of storage, display or delivery of merchandise belonging to it may not constitute a Philippine PE. Accordingly, SEPH may not constitute a Philippine PE of SEID and its Singaporean buyer for their use of SEPH's facilities for the storage of their goods for delivery. This position finds support in Bureau of Internal Revenue (BIR) Ruling No. DA-446-99 dated August 4, 1999, wherein it was held that "the storage of goods being done for GL cannot be construed as owning a warehouse in the Philippines as the facilities used are those of GPI's, an entity distinct and separate from GL. The mere fact that GL being the parent company, will not make GPI a controlled company more so, a permanent establishment of GL. Accordingly, the storage of said goods done by GPI does not constitute a permanent establishment for GL in the Philippines and therefore, not subject to income tax in the Philippines pursuant to the aforequoted provisions of the RP-Japan Tax Treaty." On the basis of the foregoing, we confirm your opinion that the sale of the LCD Modules by SEID to a Singaporean resident is not subject to Philippine income tax considering that SEID does not have a permanent establishment in the Philippines to which the business profits are attributable. This ruling is being issued on the basis of the foregoing facts as represented. However, 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