BIR Ruling [DA-512-04]

September 30, 2004 BIR RULING [DA-512-04] S.28/42 (E) DA-576-99/10-6-99 Ponce Enrile Reyes & Manalastas Law Offices 3rd Floor, Vernida IV Bldg., 128 Leviste St., Salcedo Village, Makati City Attention: Atty. Jesus M. Manalastas Atty. Emelyn Corpus-Martinez Gentlemen : This refers to your letter dated September 20, 2004 requesting, on behalf of your client, Total Lubricants Hong Kong Limited, for a confirmatory ruling based on the following factual circumstances as you represent: Total Lubricants Hong Kong Limited, a corporation duly organized under the laws of, and with principal office in, Hongkong, and which is not licensed to do business in the Philippines, intends to enter into a supply and distributorship agreement (the Distribution Agreement for brevity) with Total Philippines Corporation, a corporation duly organized under the laws of the Philippines, under the following principal terms and conditions; (a) Total Lubricants Hong Kong Limited (Supplier for brevity) will supply and sell products under Supplier's trademarks (the Products for brevity) to Total Philippines Corporation (Distributor for brevity) for resale in the Philippines. Supplier will not supply or sell Products in the Philippines other than to Distributor. Supplier does not and will not maintain any office, outlet, warehouse or other activity in the Philippines. Distributor, which is an affiliate of Supplier, has long been regularly conducting, and will continue to conduct, other businesses notwithstanding and apart from its proposed importation/resale of Products. (b) From time to time as may be determined by Distributor, during the effectivity of the Distribution Agreement, Distributor will purchase Products by sending purchase orders, specifying volumes and delivery dates and applicable FOB price, to Supplier at its principal office in Hongkong, subject to acceptance/confirmation by Supplier. Upon acceptance/confirmation by Supplier of each and any purchase order, the same will constitute a perfected and binding contract of sale between Supplier and Distributor. (c) Products to be supplied/sold by Supplier will be produced or manufactured outside the Philippines and will be sourced by Supplier either directly from Hongkong or from any other Asian country (except the Philippines) where Supplier maintains an inventory or stock of Products. Hence, Supplier will arrange for Products to be delivered to Distributor at the port of the country where Products are stored (e.g., Hongkong, Singapore, Vietnam, etc.) such port being the port of shipment. In any event, Supplier will specify upon its acceptance/confirmation of the purchase order the particular port of shipment. (d) Purchase price for Products will be FOB port of shipment. Such FOB prices will be stipulated in the Distribution Agreement. (e) Distributor will take delivery of Products (including title to and risk of loss of or damage to Products) at such port of shipment as may be designated by Supplier. Hence, Distributor will be responsible for arranging carriage/transport and insurance of Products from port of shipment to the Philippines. cAIDEa However, Distributor may at its option request and authorize Supplier to arrange carriage/transport and insurance of Products in behalf and for the account of Distributor. (f) Supplier will invoice FOB (port of shipment) price of Products to Distributor, including cost of carriage/transport and insurance if applicable. (g) Distributor will for its own account be responsible for payment of Philippine taxes, clearing Products thru Philippine customs, and transport and storage thereof to and at Distributor's warehouse. (h) Distributor will, in its name and for its account, resell Products in the Philippines. However, in order to rationalize the market and competitiveness of Products, the resale price thereof including credit terms will be in accordance with a range (maximum and minimum) of prices and credit terms to be stipulated in the Distribution Agreement, which range will take into account prevailing market prices and terms (arms length). (i) Distributor may also resell Products from time to time to foreign companies (Foreign Buyers for brevity) for delivery to such vessels docking in Philippine ports as may be designated by said Foreign Buyers. Such Foreign Buyers may include affiliates of Supplier, and may or may not own the vessels to which Products will be delivered. However, all such deliveries will be for the account of the Foreign Buyers who will be invoiced directly by Distributor. Considering the foregoing, you now request for a confirmation that: (1) On the basis of the terms and conditions of the Distribution Agreement, Distributor will be considered an independent distributor acting in its name and for its own account. (2) The situs of each sale of Products from Supplier to Distributor (i.e., each accepted/confirmed purchase order) will be deemed to be outside the Philippines considering that the perfection of the contract of sale and the delivery of Products will occur outside of the Philippines. (3) Supplier will be considered, for tax purposes, as a non-resident foreign corporation not engaged in trade or business in the Philippines. Accordingly, on its sales of Products to Distributor under the Distribution Agreement, Supplier will not be considered as deriving any Philippine-source income and will not be subject to income tax or value added tax under the National Internal Revenue Code. In reply, please be informed that in BIR Ruling DA-576-99 dated October 6, 1999, the BIR ruled that the determination of tax situs involves a consideration of two factors: (1) the place where the sale of personal property occurred and (2) the place where such personal property was manufactured. If the personal property was both produced/manufactured and sold outside the Philippines, the income derived therefrom will be regarded as sourced entirely outside the Philippines. Citing Article 1475 of the Civil Code of the Philippines, this Office stated that a contract of sale is perfected at the moment there is a meeting of the minds upon the thing which is the object of the contract and upon the price. This Office concluded that the contract of sale is perfected upon the seller's acceptance of the buyer's purchase order. Analogous rulings can be found in BIR Ruling No. 126-98 dated September 8, 1998 and the case of PF Collier vs. CIR (CTA Case No. 4355). In the aforecited BIR Ruling, it was held that gains derived by the foreign seller under a distributorship agreement were considered income from foreign sources, hence not subject to Philippine tax, since the Philippine company/purchaser took delivery of the products FOB Saudi Arabia or country of origin and title thereto transferred upon delivery abroad. In the aforesaid CTA case, the court applied the theory that the situs of sale of personal property for taxation purposes is the place where the sale is perfected and consummated, that a contract of sale is perfected at the moment there is a meeting of the minds upon the thing which is the object of the contract and the price and is consummated upon delivery of the object of the contract. The court then went on to rule that as the local distributors already knew the price of the goods when they placed or sent their specific orders to the U.S. distributor and the orders were shipped by the latter in the U.S., the sales were indeed perfected and consummated in the U.S. Accordingly, this Office hereby confirms your request that: 1. On the basis of the terms and conditions of the Distribution Agreement, Distributor will be considered an independent distributor acting in its name and for its own account; 2. The situs of each sale of Products from Supplier to Distributor (i.e., each accepted/confirmed purchase order) will be deemed to be outside the Philippines considering that the perfection of the contract of sale and the delivery of Products will occur outside of the Philippines; and 3. Supplier will be considered, for tax purposes, as a non-resident foreign corporation not engaged in trade or business in the Philippines. Accordingly, on its sales of Products to Distributor under the Distribution Agreement, Supplier will not be considered as deriving any Philippine-source income and will not be subject to income tax or value added tax under the National Internal Revenue Code. IDTSaC This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group