BIR Ruling [DA-446-99]

August 4, 1999 BIR RULING [DA-446-99] SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty . R . M . C . Vinzon Tax Division Gentleman : This refers to your letter dated January 21, 1999 requesting for a confirmation of your opinion that the storage of goods done by your client, Glory Philippines, Inc. (GPI), for its parent company, Glory Limited (GL), does not constitute a permanent establishment for GL in the Philippines. It appears that GPI is registered as a pioneer enterprise with the Philippine Economic Zone Authority (PEZA) located at Cavite Economic Zone; that it secured an authority from PEZA to sell its finished goods to GL (a corporation organized and existing under and by virtue of the laws of Japan) on a deferred actual shipment basis; that PEZA authorized such procedure for the period beginning March 30, 1998 and ending March 30, 1999; that per said procedure, ownership over the finished goods is transferred from GPI to GL only upon issuance of the sales invoice; that the finished goods are stocked with GPI until it receives instructions for shipment to GL; and that GPI charges GL storage fees. In reply, please be informed that pursuant to the pertinent provisions of Article 5 of the Philippines-Japan Tax Treaty, viz: "(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. cdll 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; "(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; xxx xxx xxx "(8) The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other Contracting State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other;" cdll Based on the foregoing, 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. It is however, understood in this connection, that GL shall be subject to the corresponding taxes prescribed under the Tax Code of 1997, should it undertake any activity other than those of the above-enumerated activities. (BIR Ruling No. 022-89 dated February 15, 1989) 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS, IV Deputy Commissioner (Legal and Enforcement Group)