BIR Ruling [DA-435-05]

October 21, 2005 BIR RULING [DA-435-05] 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 This refers to your letter dated October 11, 2005, on behalf of your client, Philippines Epson Optical Inc. (PEO) requesting for confirmation of your opinion as follows: 1. The purchase of fixed assets by PEO, a PEZA registered enterprise from Seiko Epson Corporation, a non-resident foreign corporation is not subject to the value added tax pursuant to Section 108 of the Tax Code of 1997; and 2. The purchase of fixed assets by Philippines Epson Optical Inc. from Seiko Epson Corporation, Japan, a non-resident foreign corporation is not subject to income tax pursuant to Article 5 of the RP-Japan Tax Treaty; and It is represented that sometime in June 30, 2005, Seiko Epson Corporation (SEC) sold fixed assets to Philippine Epson Optical Inc. (PEO);that these fixed assets were acquired by SEC from other Japanese residents in support of the business undertakings of its affiliate; that the sale by SEC occurred upon the issuance of a debit note by the former to the PEO, in the amount of US $3,223,259.05; that by way of background, the fixed assets, herein the object of the sale between SEC and PEO, are already in the Philippines and need not be imported; that this is due to the fact that these fixed assets were being leased by the Japanese sellers of SEC to a PEZA registered enterprise; that as such, the fixed assets need not be imported by PEO anymore. In reply, please be informed as follows: 1. The purchase of fixed assets by PEO, a PEZA registered enterprise from SEC, a non-resident foreign corporation is not subject to the value added tax . The Philippines' Value-Added Tax (VAT) law adheres to the rule that no VAT shall form part of the cost component of products which are destined for consumption outside of the territorial border of the Philippines. Hence, actual export of goods and services from the Philippines to a foreign country must be free from the imposition of VAT. Conversely, those destined for use or consumption within the Philippines shall be subject to the ten percent (10%) VAT. Thus, although Section 105 of the Tax Code of 1997 subjects to VAT any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, such person may not be subject to the payment thereof if the said goods or properties are destined for consumption outside the territorial borders of the Philippines. DcITHE In view thereof, and since the goods to be sold by SEC, a non-resident, is sold to a PEZA-registered enterprise located in an ECOZONE, whose sales are destined for export to foreign countries, the sale of SEC to PEO shall be exempt from VAT (ITAD Ruling No. 17-02 dated October 2, 2002). 2. The purchase of fixed assets by Philippines Epson Optical Inc. from Seiko Epson Corporation, Japan, a non-resident foreign corporation is not subject to income tax pursuant to Article 5 of the RP-Japan Tax Treaty . Article 7 of the RP-Japan Tax Treaty in relation to Article 5 of the same provides as follows: "Article 7 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 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" Based on the foregoing provisions, the profits of a corporation which is a resident of Japan is taxable only in Japan, unless the Japanese corporation carries on business in the Philippines through a permanent establishment situated therein and the business profits are attributable to that permanent establishment. In the instant case, SEC does not have a permanent establishment in the Philippines, as such, any income that may be derived from the sale of fixed assets to PEO is not subject to Philippine income tax pursuant to the RP-Japan Tax Treaty (ITAD Ruling No. 010-02). 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. cAHIaE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service