ITAD Ruling No. 026-99

October 1, 1999 ITAD RULING NO. 026-99 RP-US, Arts. 5 & 8 Punongbayan & Araullo 6th Floor, Vernida IV Building Alfaro St., Salcedo Village 1200, Makati City Attention: Atty . Vic C . Mamalateo Tax Partner Gentlemen : This refers to your letter dated August 4, 1999 requesting confirmation of your opinion on the tax implications of the proposed sales re-structuring operations of your client, Intel Corporation (IC) . It is represented that IC is a non-resident foreign corporation duly organized and existing under the laws of the United States of America; that Intel Philippines Manufacturing, Inc . (IPMI) and Intel Technology Phils ., Inc . ( ITPI ) are domestic corporations duly organized and existing under Philippine Laws and are registered with the Securities and Exchange Commission (SEC); that IPMI and ITPI are registered with the Board of Investments (BOI) and Philippine Economic Zone Authority (PEZA), respectively; that IC is proposing to set-up a sales subsidiary, the Intel Americas, Inc . ( IA ), a nonresident foreign corporation that will be organized under the laws of the United States of America; that the proposed business set-up between and among the above-mentioned corporations will be as follows: 1. IC will consign goods to ITPI and IPMI for assembly and test processing and the contract between them is limited to the said activities; LexLib 2. IA will buy the assembled and tested products from IC and title over the goods will be transferred to IA in the Philippines; 3. IA will pick-up its own finished goods from IPMI and ITPI and the contract between them is limited to picking, packing and shipping for IA; 4. IPMI and ITPI are entitled to collect from IC service fees for assembly and test processing and from IA service fees for picking, packing and shipping at cost plus 10% mark-up; 5. The sales territory of IA will be the western hemisphere. On the basis of the foregoing facts of the proposed business structure, you now request for a ruling confirming the following: 1. Intel Corporation is not subject to Philippine income tax on the sale of goods to Intel Americas, Inc.; 2. Intel Americas, Inc. is not subject to Philippine income tax on the sale of goods to its foreign customers; and 3. The net income derived by IPMI and ITPI on the picking, packing and shipping service fees will be subject to the normal corporate income tax at 33% for 1999 and at 32% beginning 2000. In reply, please be informed that Article 8 (1) and Article 5 (1) and (2) of the RP-US Tax Treaty provide, viz: Article 8 BUSINESS PROFITS "(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 . "xxx xxx xxx" "Article 5 PERMANENT ESTABLISHMENT "(1) For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which a resident of one of the Contracting States engages in a trade or business. "(2) The term "fixed place of business" includes but is not limited to : (a) A seat of management; (b) A branch; (c) An office; (d) A store or other sales outlet; (e) A factory; (f) A workshop; (g) A warehouse; (h) A mine, quarry, or other place of extraction of natural resources; (i) A building site or construction or assembly project or supervisory activities in connection therewith, provided such site, project or activity continues for a period of more than 183 days; and (j) The furnishing of services, including consultancy services, by a resident of one of the Contracting States through employees or other personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or period aggregating more than 183 days. Based on the above-quoted provisions, IC and IA will be taxable in the Philippines only if they have a permanent establishment situated in the Philippines. The contract of IC with ITPI and IPMI is limited to assembly and testing. These activities performed by ITPI and IPMI for IC will not produce any taxable profit or gain for the latter. On the other hand, the contract of IA with ITPI and IPMI is limited to picking, packing and shipping of the assembled and tested goods. Since transfer of title over the goods from IC to IA will take place in the Philippines, IA as owner of the assembled and tested goods hires the services of ITPI and IPMI for picking, packing and shipping of the same. Considering that both IC and IA do not have permanent establishments in the Philippines to which its business profits or income is attributable and considering further that the sales agreement between IC and IA on one hand, and the sales agreement between IA and foreign customers on the other hand, will take place outside the Philippines, both IC and IA are not subject to Philippine income tax and consequently to the withholding tax prescribed under the National Internal Revenue Code of 1997. LibLex However, the net income derived by ITPI and IPMI from IC for assembly and testing services and from IA for the picking, packing and shipping services will be subject to the normal corporate income tax of 33% for 1999 and 32% beginning 2000, and the sale of services is VAT zero-rated, in accordance with Section 27 of the National Internal Revenue Code of 1997 . 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, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue