Aranas Consunji & Barleta Law Office

May 16, 2008 BIR RULING [DA-292-08] 106 (A); DA-079-2006 Aranas Consunji & Barleta Law Office Unit 106 G/F Le Metropole Condominium Tordesillas corner Dela Costa Streets, Salcedo Village, Makati City Attention: Atty. Jesus Clint O. Aranas Gentlemen : This refers to your letter dated April 23, 2008 requesting on behalf of your client, Epson Imaging Devices (Phils.), Inc. ("EIPH") for confirmation of your opinion as follows: 1. The sale by EIPH of its finished products to EID-Japan is not subject to income tax considering that EIPH is enjoying the income tax holiday incentive regime. 2. The sale by EIPH of its finished products to EID-Japan, for delivery to a resident of the Philippines, is considered as a foreign currency denominated sale subject to value added tax at zero percent. 3. The storage of the finished products purchased by EID-Japan in EID Hub Warehouse, a separate location allocated by EIPH for EID-Japan, shall not constitute a permanent establishment to which its business profits can be attributable. It is represented that Epson Imaging Devices (Phils.), Inc., is a corporation duly organized and existing under the laws of the Philippines and is located at SEPZ, Laguna Technopark, Bian, Laguna; that it is registered with the Philippine Economic Zone Authority (PEZA) as an ecozone export enterprise and is currently enjoying the income tax holiday (ITH) regime. IDESTH It is further represented that EIPH intends to sell to Epson Imaging Devices-Japan, a non-resident foreign corporation, its finished products, i.e. Amorphous TFT and TFD; that in view of EIPH's adjustment of its production system, plant layout and increase in models arising from its huge export projection, EIPH intends to store the finished products purchased by EID-Japan at a separate location in its warehouse specifically allocated to EID (herein referred to as EID Hub Warehouse), until the goods are withdrawn for delivery to EID-Japan's customers. In reply, please be informed as follows: 1. PEZA-registered enterprises enjoying ITH are exempt from the payment of withholding tax imposed under RR No. 2-98, as amended by RR No. 30-2003, on income payments received during the ITH period in connection with the conduct of its registered activity. (BIR Ruling No. DA-300-03 dated September 11, 2003; BIR Ruling No. DA-060-2002 dated April 1, 2002 and BIR Ruling No. 143-91 dated August 2, 1991). Considering that EIPH is a PEZA-registered enterprise enjoying the ITH incentive, payments received by it from its sale of finished products to its customers, including sale to EID-Japan, shall be exempt from income tax and withholding tax. 2. Section 106 (A) (2) (b) of the Tax Code of 1997 provides that foreign currency denominated sales by VAT-registered persons shall be subject to zero percent (0%) rate. The phrase "foreign currency denominated sales" means sale to a non-resident of goods for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. (BIR Ruling No. DA-161-05 dated April 14, 2005) In view of the foregoing, the sale by EIPH of its finished products to EID-Japan, a non-resident foreign corporation, intended for delivery to a resident of the Philippines shall be considered as a foreign currency denominated sale subject to value-added tax at zero percent (0%) rate. 3. Article 7 of the RP-Japan tax treaty states. ASIETa "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-Japan Tax Treaty provides: "PERMANENT ESTABLISHMENT "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. xxx xxx xxx (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; DCIAST (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise." The foregoing provision of the RP-Japan Tax treaty was applied in BIR Ruling No. DA-079-2006 dated March 6, 2006, to wit: "Article 5, paragraph (4) of the RP-J apan T ax 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." Considering that the storage of the finished products purchased by EID-Japan in EID Hub Warehouse, a separate location allocated by EIPH for EID-Japan, is purely for purposes of storage until actual delivery to various customers of EID-Japan, the same shall not constitute a permanent establishment to which business profits may be attributable. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered null and void. CaEATI Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service