Aranas Consunji Barleta

July 24, 2009 BIR RULING [DA-(C-143) 401-09] 106 (A) (2) (b); RR 30-2003; DA-300-03; DA-060-2002; DA-292-08; DA-079-2006; DA-161-2005 Aranas Consunji Barleta Unit 106 G/F Le Metropole Building 326 Tordesillas cor. De la Costa Streets Salcedo Village, Makati City Attention: Atty. Jesus Clint O. Aranas Gentlemen : This refers to your letter dated June 8, 2009 requesting in behalf of your client, Philippines Epson Optical (hereinafter "PEO"), for confirmation that sale by PEO of its finished goods to Seiko Epson Corporation (hereinafter "SEC") shall have the following tax implications in the Philippines: 1. The sale by PEO of its finished products to SEC is not subject to income tax considering that PEO is enjoying the income tax holiday (ITH) incentive regime. 2. The sale by PEO of its finished products to SEC, a non resident foreign corporation, is considered as export sale subject to value-added tax (VAT) at zero percent. 3. The storage of the finished goods purchased by SEC in PEO's warehouse allocated specifically for SEC purchases shall not constitute a permanent establishment to which business profits may be attributable. It is represented that PEO is a corporation organized and existing under the laws of the Philippines with business address at Special Export Processing Zone, Gateway Business Park, Javalera, General Trias, Cavite, and registered as an Ecozone Export Enterprise under Philippine Economic Zone Authority (PEZA) Certificate of Registration No. 05-011. As a PEZA-registered enterprise, PEO is enjoying ITH as part of its fiscal incentives granted by the PEZA. It is further represented that PEO and SEC, a non-resident foreign corporation existing by virtue of the laws of Japan, entered into a manufacturing agreement whereby PEO shall manufacture and sell its various finished goods to the latter company. On May 31, 2009, SEC and PEO amended its manufacturing agreement in order to reflect the new delivery scheme to be adopted on the purchased goods. Under the said scheme, PEO shall store temporarily all finished goods purchased by SEC in PEO's warehouse until the goods are withdrawn for delivery to SEC's customers abroad. Further, SEC shall remit its foreign currency payments for the goods purchased from PEO in accordance with rules and regulations of the Bangko Sentral ng Pilipinas (BSP). In reply thereto, please be informed as follows: 1. PEZA-registered enterprises enjoying ITH are exempt from the payment of withholding tax imposed under Revenue Regulations (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). Thus in BIR Ruling No. DA-292-08 dated May 16, 2008, it was held that: "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." Applying the above in the instant case, PEO as a PEZA-registered enterprise shall be exempt from income and withholding tax on payments received by it from its sale of finished products to SEC during the ITH period. 2. Sec. 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) Again in BIR Ruling No. DA-292-08, this Office states that: "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) 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." In view of the foregoing, the sale by PEO of its finished products to SEC, shall be considered as a foreign currency denominated sale subject to VAT at 0% rate. 3. Article 7 of the RP-Japan tax treaty states that: "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; (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-Japan Tax 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 SEC in PEO's Warehouse, a separate location allocated by PEO for SEC, is purely for purposes of storage until actual delivery to various customers of SEC, 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 ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service