BIR Ruling [DA-576-99]

October 6, 1999 BIR RULING [DA-576-99] Mariano C. Ereso, Esq. Partner Ongkiko Kalaw Manhit & Acorda Law Offices 4F Cacho-Gonzalez Building 101 Aguirre Street, Legaspi Village Makati S i r : This refers to your request for confirmation of your opinion that any gain realized by your client, PANASONIC INDUSTRIAL COMPANY, from its proposed sales transaction with American Power Conversion - Philippines will not be subject to Philippine income tax, nor will it be considered as having created a permanent establishment in the Philippines. LibLex It is represented that PANASONIC INDUSTRIAL COMPANY (hereinafter to be referred to as "PIC"), a division of Matsushita Electric Corporation of America, is a corporation organized under the laws of the State of Delaware, U.S.A. and with principal offices at Two Panasonic Way, Secaucus, New Jersey, 07094; that it does not have an office in the Philippines; that AMERICAN POWER CONVERSION - Philippines (hereinafter to be referred to as "APC") is a wholly-owned Philippine subsidiary of American Power Conversion Corporation with headquarters at Rhode Island, U.S.A. and with principal/business offices at 6817 H.V. dela Costa Street corner Ayala Avenue, Salcedo Village, Makati City; that PIC intends to sell its battery products to APC under the following terms and conditions 1. APC will place with PIC a blanket purchase order specifying the total quantity and price with a perpetual schedule of delivery dated for the quantity of goods ordered; 2. PIC will order its factories in China, U.S.A. and/or Mexico to manufacture the goods ordered by APC. PIC will purchase the finished goods from the factory/ies with terms of F.O.B. factory and the goods will then be shipped to the Philippines; all costs associated with the movement of the goods from the factory to the warehouse in Manila will be paid by PIC; 3. The Matsushita sourced factory of the goods, which may be located in China, U.S.A. or Mexico, will be named as the shipper of the goods in all the shipping documents (e.g., bill of lading, commercial invoice and packing list). The First Covenant Manila Corporation (hereinafter to be referred to as "FCMC") which owns a customs bonded warehouse operated by GEO Logistics will be designated as consignee while APC will be the notified party on all the shipping documents; 4. Upon arrival of the goods in Manila, the goods as required by APC will be stored in the FCMC customs bonded warehouse in the name of APC. The storage of the goods in customs bonded warehouse is for the benefit of APC as it defers the payment of customs duties, 10% VAT and other related charges due until APC withdraws the goods from the FCMC bonded warehouse; 5. APC will make periodic withdrawals from the FCMC customs bonded warehouse. APC will pay the customs duties, 10% value-added tax and other related charges due and payable on the goods withdrawn from the FCMC customs bonded warehouse. On each withdrawal, APC will issue a release against the blanket purchase order to PIC. PIC will then invoice APC for the withdrawn goods. On the basis of the represented facts, the issues for our resolution are two-fold: (a) Whether or not the sale of goods by PIC to APC is a taxable transaction under the pertinent provisions of the National Internal Revenue Code, as amended (hereinafter to be referred to as "NIRC"); and (b) Whether or not PIC is deemed to be doing business in the Philippines through a permanent establishment by the storage of goods in a customs bonded warehouse. A careful consideration of the facts leads us to the ineluctable conclusion that PIC will not be deemed to be deriving income from sources within the Philippines by virtue of the arrangements it has agreed with APC. Further, APC's arrangements for a customs bonded warehouse will not create a permanent establishment for PIC. Pursuant to Section 23(F) of the NIRC, a foreign corporation, whether or not engaged in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. From this rule, it becomes axiomatic that income derived by such nonresident foreign corporation from sources without the Philippines are not taxable under Philippines laws. The rule in this jurisdiction regarding tax situs is: the source of an income is the property, activity or service that produced the income; the test of taxability is the " source " and the source of an income is that activity which produced the income. ( Commissioner of Internal Revenue vs . British Overseas Airways Corporation , En Banc, G.R. Nos. 65773-74, April 30, 1987). The concept of "source of income" under the present Section 23 of the NIRC actually finds its origin in the United States tax system. Thus, while income may be derived from three possible sources: (1) capital ; (2) labor ; and/or (3) sale of assets , the source of income rule applicable in this case involves the sale of personal property. The determination of tax situs in this regard involves a consideration of two factors: (1) the place where the sale of such personal property occurs ; and (2) the place where such personal property was manufactured . If the personal property involved was both produced or manufactured and sold outside the Philippines , the income derived therefrom will be regarded as sourced entirely outside the Philippines . (Mertens, volume 8, section 45.27, pages 96-102). Furthermore, Article 1475 of the Civil Code of the Philippines provides that a contract of sale is a consensual contract and such being the case, it 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. From the facts presented above, the contract of sale is perfected upon the acceptance by PIC of APC's blanket purchase order. The order given by PIC to the factory in China, U.S.A. and/or Mexico to manufacture the goods in accordance with the terms of the blanket purchase order of APC, which is done outside the Philippines, must necessarily be construed as PIC's acceptance of APC's order for the goods. Considering that the acceptance by PIC is made abroad, the sale is considered to have taken place outside the Philippines. Moreover, Section 42(E) of the NIRC provides insofar as may be relevant that " gains , profits and income derived from the purchase of personal property without and its sale within the Philippines shall be treated as derived entirely from sources within the country in which sold ." To implement this provision, Section 159 of the Revenue Regulations No. 2 otherwise known as the Income Tax Regulations provides, thus: "Section 159. Sale of personal property . Income derived from the purchase and sale of personal property shall be treated as derived entirely from the country in which sold . The word ' sold ' includes ' exchange '. The ' country ' in which ' sold ' ordinarily means the place where the property is marketed . This Section does not apply to income from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the Philippines or produced (in whole or in part) by the taxpayer without and sold within the Philippines." (Italics supplied for emphasis) Based on the said Section 159 of Revenue Regulations No. 2, the rule may now be stated that the country in which the goods are marketed is in the United States, if the acceptance by PIC of the blanket purchase order of APC is done in the United States. A related issue is whether or not a permanent establishment will be created by the utilization of a customs bonded warehouse for the importation of the battery products. Under the arrangement between PIC and APC, the goods upon arrival in the Port of Manila are stored by FCMC as the consignee in its customs bonded warehouse for the account of APC as the notified party on all the shipping documents. This being so, PIC has not created, and does not have, a permanent establishment in the Philippines. Under the provisions of Article 5(3)(b) of the Philippines-United States Tax Treaty, which reads, thus: "(3) Notwithstanding paragraphs (1), (2) and (4), a permanent establishment shall be deemed not to include any one or more of the following: "(a) . . . "(b) The maintenance of a stock of goods or merchandise belonging to the resident solely for the purpose of storage, display, or occasional delivery;" it is not PIC that owns and maintains the goods or merchandise in the FCMC customs bonded warehouse, but APC which is the real consignee and therefore the importer of the said goods. Therefore, if PIC is not considered to have created a permanent establishment, any gains (i.e., business profits) it will realize under the transaction with APC, will not be subject to Philippine income tax in view of the Article 8(1) of the Philippines-United States Tax Treaty, to wit: "(1) Business profits of a resident of one of the Contracting States shall be taxable only in that State , unless the resident has a permanent establishment in the other Contracting State . If the resident has a permanent establishment in that other Contracting State, tax may be imposed by that other Contracting State on the business profits of the resident but only so much of them as are attributable to the permanent establishment." (Italics supplied for emphasis.) Accordingly, it is the opinion of this Office that the sale of goods abroad by PIC to APC is not subject to income tax in the Philippines considering that PIC is a nonresident foreign corporation not engaged in trade or business in the Philippines pursuant to Section 28(B)(1) of the Tax Code of 1997, in relation to Section 23(F) of the same Code. Thus, any income derived by PIC from the said sale transaction with APC is deemed to be income derived from sources outside the Philippines. Furthermore, PIC is considered as not having created a permanent establishment in the Philippines as it does not have a fixed place of business in the Philippines under the relevant provisions of Article 5 of the RP-US Tax Treaty considering that the importation is made by its customer and the storage of the goods in customs bonded warehouse is a requirement and for the benefit of APC, and not PIC. Consequently, the provision of Article 8(1) of the RP-US Tax Treaty finds no application here. However, APC shall be liable to the 10% VAT and other related charges on the importation of the said goods. LexLib This ruling is being issued on the basis of the facts as represented. If, however, it will be discovered upon investigation that the facts are otherwise, then this ruling will be rendered null and void and therefore, of no legal effect. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement)