ITAD BIR Ruling No. 310-13

November 18, 2013 ITAD BIR RULING NO. 310-13 Articles 5 & 7, Philippines-China tax treaty Step Asia, Inc. 1100, 88 Corporate Center Sedeno cor. Valero Sts. Salcedo Village, Makati City Attention: Michael Aguinaldo Abaya Legal Counsel Gentlemen : This refers to your application for tax treaty relief dated 14 December 2012 requesting confirmation that the profits from the sale of goods paid by Toshiba Information Equipment (Philippines) ("TIP") to Toshiba International Trading Shanghai Co., Ltd. ("TISH") are exempt from income tax pursuant to Agreement between the Government of the Republic of the Philippines and the Government of the People's Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-China tax treaty") . 1 TAcSCH Facts It is represented that TISH is a foreign corporation organizes and existing under the laws of China as evidenced by its Articles of Incorporation executed on 01 August 2012, duly authenticated by the Consul of the Republic of the Philippines in and for Shanghai, dated 10 December 2012; that TISH is a resident of China with business address at Room 734, Sanlian Mansion Bldg., No. 8 Rd. Hua Jing Waigaoqiao Free Trade Zone, Shanghai, China, as evidenced by Certificate of Chinese Fiscal Resident issued by the Local Tax Bureau of Pudong New Area Shanghai, dated 29 November 2012, duly authenticated by the Consul of the Republic of the Philippines in and for Shanghai, dated 17 December 2012; that TISH is not registered as a corporation or partnership in the Philippines based on the Certification of Non-registration of Company issued by the Securities and Exchange Commission (SEC) on 08 July 2013; and that, on the other hand, TIP is a corporation duly organized and existing under the laws of the Philippines, with business address at 103 East Main Ave. Extension, Special Expert Processing Zone, Laguna Technopark, Bian, Laguna. It is further represented that TIP is engaged in the design, manufacture and sale of hard disk drives and TISH on the other hand, is engaged in the buying and selling of magnetic heads for hard disk drives; that TIP and TISH entered into a Just in Time Inventory Agreement ("Agreement") executed on 12 December 2012, wherein TISH agrees to deliver magnetic heads to the warehouse of TIP on a regular basis; that TISH will recognize sales and will issue an invoice to TIP only upon withdrawal by TIP of the magnetic heads from the warehouse and TIP on its part, will not recognize as its inventories the raw materials stored in the warehouse until it is actually withdrawn for production purposes; and that TISH alleged that it does not have a permanent establishment in the Philippines pursuant to Article 5 of the Philippines-China tax treaty and consequently, the business profits received are exempt from income tax pursuant to Article 7 of the same treaty. It is further represented that TIP shall make payment of the products to TISH in US Dollars by Telegraphic Transfer remittance no later than sixty (60) days from the end of each month in which the delivery of magnetic heads is made; and that the amount of Fifteen Million Four Hundred Five Thousand Nine Hundred Thirty Four and 10/100 United States Dollars (USD15,405,934.10) was paid by TIP through Bank of Tokyo-Mitsubishi UFJ (via S.W.I.F.T.) on 01 April 2013, as evidenced by Sworn Statement executed by the Vice President of TIP on 16 April 2013. It is finally represented that the transactions subject of this ruling are not subject of investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Sworn Statement issued by the Vice President of TIP executed on 31 May 2013. Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, the profits paid to TISH are subject to income tax at the rate of 30 percent, thus: IATSHE "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation . (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty percent (30%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c) and (d) above." * However, under Section 32 (B) (5) of the Tax Code, such profits may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "SEC. 32. Gross Income . xxx xxx xxx (B) Exclusions from Gross Income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty . Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." With respect to a treaty, you invoke the Philippines-China tax treaty. Article 7 (1) thereof provide: "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." ASHICc In relation thereto, Article 5 (1) and (2) of the Philippines-China tax treaty defines "permanent establishment" as: "Article 5 Permanent Establishment 1. For the purposes of this Agreement, 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 place of management; b) a branch; c) an office; d) a factory; e) a workshop; and f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources." Based on the above quoted provisions, the business profits of TISH shall be taxable in the Philippines if it has a permanent establishment situated in the Philippines and only so much of it is attributable to that permanent establishment. In the instant case, the subject warehouse is being utilized by its owner, TIP, for storing raw materials delivered to the latter by TISH in accordance with the Agreement. As represented, TISH will deliver raw materials to TIP's warehouse but sales will be recognized only upon actual withdrawal of such raw materials by TIP for production purposes. Based on this arrangement, the use of the warehouse is for the benefit of TIP and not for the purpose of establishing a fixed place through which the business of TISH are to be wholly or partly carried on. If any, the relation between the warehouse and the foreign suppliers under the arrangement is merely to attain the ultimate objective of carrying out the Agreement. Accordingly, since TISH does not maintain a permanent establishment in the Philippines, business profits received by latter from the sale of magnetic heads for hard disk drives to TIP are exempt from income tax pursuant to Article 7, in relation to Article 5 of the Philippines-China tax treaty. Furthermore, under Section 106 (A) of the Tax Code, the said sale of magnetic heads for hard disk drives are subject to twelve percent (12%) value-added tax ("VAT"), to wit: aIAHcE "SEC. 108. Value-added Tax on Sale of Goods or Properties . (A) Rate and Base of Tax . There shall be levied, assessed and collected, on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%) . . ." Accordingly, TIP, being the resident withholding agent and payor in control of the payment, shall be responsible for the withholding of the 12% final VAT on such business profits before making any payment to TISH. In remitting the VAT withheld, TIP shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax by TIP upon filing its own VAT return, if it is a VAT-registered taxpayer. In case TIP is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of goods or properties purchased which may be treated as an "expense" or as an "asset", whichever is applicable. In addition, TIP required to issue the Certificate of Final Income tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to TISH upon its request and the fourth copy to be retained by TIP as its file copy. [Section 4.110.3 (b), Revenue Regulations No. (RR) 7-95, as amended by RR 08-02 (now Section 4.114-2, RR 16-05, as amended by RR 04-07); Section 4.114 (d), as amended by RR 28-03] This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. IcCEDA Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Date of effectivity of taxes on income: January 1, 2002.