Samsung Electronics Philippines Manufacturing Corporation

July 2, 2009 BIR RULING [DA-(VAT-063) 335-09] 109; Art. 5 & 7 RP-Korea; DA-108-07 Samsung Electronics Philippines Manufacturing Corporation Block 6, Calamba Premiere International Park Calamba, Laguna Attention: Sang Ho Park Chief Financial Officer Gentlemen : This refers to your letter dated June 15, 2009 requesting for a ruling that the purchase of pick-up assembly products, raw materials, machineries and equipment by SEPHIL, a PEZA registered enterprise from OPIK, a non-resident foreign corporation, is not subject to the value added tax (VAT) pursuant to Section 109 of the Tax Code of 1997 and to income tax pursuant to Article 7, in relation to Article 5, of the RP-Korea Tax Treaty. It is represented that Samsung Electronics Philippines Manufacturing Corp. (SEPHIL) is a corporation duly organized and existing under Philippine laws with office address at the Calamba Premiere International Park-Special Economic Zone. It is registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise under Registration Certificate No. 01-011 dated February 9, 2001 and enjoys the 5% preferential tax on gross income earned in lieu of the payment of all other local and national taxes on its registered activity consisting of the design, manufacture, and sale of electronic products, including optical disk drive products, their components and parts. SEPHIL entered into a Sales Agreement with Optis Co. Ltd., (OPIK), a non-resident foreign corporation without a permanent establishment in the Philippines and which is duly organized and existing under and by virtue of the laws of Korea, with registered office at A-1007, Digital Empire, 980-3 Yeongtong-Dong, Yeongtong-Gu, Suwon-Si, Yeonggi-Do, Korea 443-702. The Sales Agreement involves the purchase by SEPHIL from OPIK of optical pick-up assembly products, raw materials, used machineries and equipment which were consigned by OPIK to Optis Philippines Inc., (OPI). OPI is also a PEZA registered corporation duly organized and existing under Philippines laws with office address at C4 Carmelray Industrial Park II, Calamba Special Economic Zone engaged in the business of manufacturing and exporting parts for electronic equipment specializing in quality pick-up motors and other computer parts and to trade the same as a wholesale basis. Upon the sale, the items will be physically transferred from OPI to SEPHIL and will be consigned eventually by SEPHIL to OPI for the production of pick-up assembly requirements of SEPHIL. AaCcST Based on the foregoing, you now request for confirmation of your opinion that the foregoing transaction is not subject to VAT and to Philippine income taxes pursuant to Article 7, in relation to Article 5, of the RP-Korea Tax Treaty. In reply, please be informed as follows: 1. The purchase of pick-up assembly products, raw materials, machineries and equipment by SEPHIL from OPIK is not subject to VAT. The Philippines' 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 twelve percent (12%) 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. cDEHIC In view thereof, and since the goods to be sold by OPIK, a non-resident, are sold to a PEZA-registered enterprise located in an ECOZONE, whose sales are destined for export to foreign countries, the sale thereof to SEPHIL by OPIK shall be exempt from VAT. (ITAD Ruling No. 17-02 dated October 2, 2002 as reiterated in BIR Ruling DA-435-05 dated October 21, 2005). 2. The income payment to be received by OPIK, a non-resident foreign corporation, from the sale of the goods is not subject to income tax pursuant to Article 7, in relation to Article 5, of the RP-Korea Tax Treaty. Article 7, in relation to Article 5, of the RP-Korea Tax Treaty provides as follows: "Article 7 Business Profits 1. The profits of an enterprise of a Contracting State shall be taxable only in that 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 the other State but only so much of them as is attributable to that permanent establishment." EASCDH "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: HCDaAS a) a place of management; b) a branch; c) an office; AEcTCD d) a factory; e) a workshop; f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; AEcTCD g) premises used as a sales outlet; and h) a warehouse, in relation to a person providing storage facilities for others; xxx xxx xxx" Based on the foregoing provisions, the profits of a corporation which is a resident of Korea are taxable only in Korea, unless the Korean corporation carries on business in the Philippines through a permanent establishment and the business profits are attributable to that permanent establishment. In the instant case, OPIK does not have a permanent establishment in the Philippines. Consequently, any income that may be derived from the sale of the pick-up assembly products, raw materials, machineries and equipment to SEPHIL is not subject to Philippine income tax pursuant to the RP-Korea Tax Treaty (ITAD Ruling No. 187-02 dated October 22, 2002; DA-108-07 dated February 19, 2007). 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service