ITAD Ruling No. 027-04

March 25, 2004 ITAD RULING NO. 027-04 Articles 5 & 8, RP-US tax treaty Articles 5 & 7, RP-Japan tax treaty Articles 5 & 7, RP-UK tax treaty Articles 5 & 7, RP-China tax treaty Articles 5 & 7, RP-Netherlands tax treaty Republic Act No. 7916 Sections 27(A) & (E), 107, and 108, Tax Code of 1997 Section 4.100-2 (a) (5), Revenue Regulations No. 7-95 BIR Ruling No. ITAD-170-02 BIR Ruling No. ITAD-182-00 VAT Ruling No. 001-00 VAT Ruling No. 011-98 Punongbayan & Araullo 20th Floor, Tower 1, The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: Maria Victoria C. Espao Tax Partner Gentlemen : This refers to your application for relief from double taxation dated January 26, 2004, on behalf of your client, Intel Technology Phils. Inc. (ITPI), requesting confirmation of your opinion that: 1) any business profits to be derived by Intel Corporation (IC) and the Intel-Selling Entities enumerated below, all non-resident foreign corporations, from the proposed sales structure hereunder described, are not taxable due to the absence of a permanent establishment (PE) in accordance with the provisions of the pertinent Philippine tax treaties; 2) the sale of goods by IC to the Intel Selling Entities and the sale by the latter to customers located in special economic zones registered with the Philippine Economic Zone Authority (PEZA) and Subic Bay Metropolitan Authority (SBMA) are exempt from VAT; 3) the sale of goods by the Intel Selling Entities to customers/buyers outside the economic zones shall be considered importation subject to VAT on the part of the importer-customer; 4) the income derived by ITPI from picking, packing and shipping services to be provided to Intel-Selling Entities will be subject to the normal corporate income tax at 32% tax rate; and 5) the income received by ITPI are zero-rated for VAT purposes. It is represented that IC is a non-resident foreign corporation duly organized and existing under the laws of the United States of America (USA); that IC is licensed to establish a regional or area headquarters (RHQ) in the Philippines per Certificate of Registration and License dated January 23, 1978 issued by the Securities and Exchange Commission (SEC); that the activities of the RHQ are limited to acting as supervision, communication and coordination center for its affiliates, subsidiaries or branches in the Asia-Pacific Region; that IC decided not to operate the RHQ, as such, it has not performed any business activity; that IC consigns goods to ITPI for assembly and test processing; that ITPI is domestic corporation organized and existing under Philippine laws registered with the PEZA; that the Intel-Selling Entities are non-resident foreign corporations not registered either as corporations or as partnerships and have not been licensed to do business in the Philippines per certifications issued by the Securities and Exchange Commission (SEC) all dated January 22, 2004; that under the service agreement between IC and ITPI, IC retains ownership over the raw materials consigned to ITPI; that ITPI does not have the power to contractually bind IC in any manner; that all decisions and strategies relating to the sale of the finished goods remain with IC; that for the assembly and testing services, IC shall pay ITPI an agreed service fee set at arm's length basis; that after the consigned goods have been assembled and tested by ITPI, based on worldwide business plans, IC is planning to sell the assembled and tested goods to its different affiliates (herein collectively referred to as "Intel-Selling Entities"), which the latter, in turn, subsequently sell the goods to their respective third-party customers around the world, including the Philippines; that the Intel-Selling Entities, with their respective country of residence, are as follows: Company Name Country of Residence Intel Americas, Inc. United States of America Intel Services APAC, Inc. United States of America Intel Technologies, Inc. United States of America Intel Mediterranean Trading United States of America Intel Kabushiki Kaisha Japan Intel Trading (Shanghai) Ltd. China Intel Trading (Shenzen) Ltd. China Intel Corp. (UK) Ltd. United Kingdom Intel International B.V. Netherlands It is further represented that for goods intended to be sold to customers in the Philippines, the Intel-Selling Entities will implement a Direct Delivery arrangement whereby they will give orders for the goods that they purchased from IC, after the goods have been assembled and tested by ITPI, to be delivered directly to the local customers; that for this purpose, each of the Intel-Selling Entities will contract ITPI to handle the picking, packing and shipping services of the goods for which ITPI will be compensated by the Intel-Selling Entities at arm's length rate; that ITPI does not have the authority to conclude contracts with customers in the name or on behalf of the Intel-Selling Entities; and that the assembled and tested goods sold by IC to the Intel-Selling Entities will stay with ITPI only for a brief period of time long enough for them to be packed and shipped to the customers. In reply, this Office is of the opinion and so holds: Whether the business profits to be derived by IC and the Intel-Selling Entities from the proposed sales structure described above, are not taxable in the Philippines due to the absence of a PE in accordance with the provisions of the pertinent Philippine tax treaties The income tax consequences of the above proposed sales structure to IC and Intel-Selling Entities shall be governed primarily by the pertinent provisions of the applicable Philippine tax treaty. As for the residents of the United States, which include IC, Intel Americas, Inc., Intel Technologies, Inc., Intel Mediterranean Trading and Intel Services APAC, Inc., the Philippines USA tax treaty shall apply. Similarly, for Intel Kabushiki Kaishia and Intel Corp. (UK) Ltd., the Philippines-Japan and Philippines-United Kingdom tax treaties apply, respectively and in the case of Intel Trading (Shanghai) Ltd. and Intel Trading (Shenzhen) Ltd., the Philippines-China tax treaty, and for Intel International B.V., the Philippines-Netherlands tax treaty, to wit : TCacIE Philippines-United States tax treaty "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 on so much of them as are attributable to the permanent establishment. "xxx xxx xxx" "Article 5 "PERMANENT ESTABLISHMENT "(1) For the purpose 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 connected project) within the other Contracting State for a period or periods aggregating more than 183 days. "xxx xxx xxx" "(4) A person acting in one of the Contracting States on behalf of a resident of the other Contracting State, other than an agent of an independent status to whom paragraph (5) applies, shall be deemed to give rise to a permanent establishment in the first-mentioned Contracting State if (a) Such person has, and habitually exercises in the first-mentioned Contracting State, an authority to conclude contracts in the name of that resident, unless the exercise of such authority is limited to the purchase of goods or merchandise for that resident; or (b) He has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods and merchandise on behalf of the resident. "(5) A resident of one of the Contracting States shall not be deemed to have a permanent establishment in the other Contracting State merely because such resident carries on business in that other Contracting State through a broker, general commission agent, or any other agent of an independent status, where such broker or agent is acting in the ordinary course of his business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that resident, he shall not be considered an agent of independent status within the meaning of this paragraph if the transactions between the agent and the resident were not made under arms length conditions. "xxx xxx xxx." Philippines-Japan tax treaty "Article 7 (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. "xxx xxx xxx." "Article 5 (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. (3) A building site or construction or installation project constitutes a permanent establishment only if it lasts more than six months. "xxx xxx xxx." (7) An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other Contracting State through a bona fide broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. "xxx xxx xxx." Philippines-United Kingdom tax treaty "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 directly or indirectly attributable to that 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 in which the business of the enterprise is wholly or partly carried on. (2) The term "permanent establishment" shall include especially; a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; f) a mine, oil well, quarry or other place of extraction of natural resources; g) an installation or structure used for the exploration of natural resources; h) a building site or construction or assembly project which exists for more than 183 days. 3) An enterprise of a Contracting State shall likewise be deemed to have a permanent establishment in the other Contracting State if: a) it carries on supervisory activities within that other Contracting State for more than 183 days in connection with a building site, or a construction or assembly project which is being undertaken, in that other Contracting State; or b) it furnishes services, including consultancy services, in that other Contracting State through its employees or other personnel (other than agents of an independent status within the meaning of paragraph 7 of this Article) for a period exceeding in the aggregate 183 days within any twelve-month period. "xxx xxx xxx." (7) An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, he shall not be considered an agent of an independent status within the meaning of this paragraph. Philippines-China tax treaty "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. "xxx xxx xxx." "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. (3) The term "permanent establishment" likewise encompasses: a) a building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only where such site, project or activities continue for a period of more than 6 months. b) an installation, drilling rig or ship used for the exploration of natural resources; but only if so used for a period of more than three months; and c) the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise but only where activities of that nature continue (for the same or a connected project) within the country for a period or periods aggregating more than 6 months within any twelve-month period. "xxx xxx xxx." (6) An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State, though a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. ETDAaC Philippines-Netherlands tax treaty "Article 7 BUSINESS PROFITS (1) The profits of an enterprise of one of the States shall be taxable only in that State unless the enterprise carries on business in the other 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. "xxx xxx xxx." "Article 5 PERMANENT ESTABLISHMENT (1) For the proposes of this Convention, the term "permanent establishment" means a fixed place of business in which the business of the 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; f) a mine, quarry or other place of exploration or extraction of natural resources; g) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than 183 days; h) the furnishing of services including consultancy services by an enterprise through an employee or other personnel where activities of that nature continue (for the same or a connected project) for a period or periods exceeding in the aggregate 183 days within any twelve-month period. "xxx xxx xxx." (6) An enterprise of one of the States shall not be deemed to have a permanent establishment in the other State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business." Based on the above-quoted provisions, the income of IC and the Intel-Selling Entities shall be taxable in the Philippines only if they are deemed to have a permanent establishment situated in the Philippines as defined under the above Philippine tax treaties. As regards IC, paragraph 2 of the Philippines-United States tax treaty contains a list, by no means exhaustive, of examples, each of which constitutes a permanent establishment. As these examples are to be seen against the background of the general definition given in paragraph 1, it is assumed that the Contracting States ( i . e ., the Philippines and the United States of America) interpret the terms listed in such a way that such places of business constitute permanent establishments only if they meet the requirements or conditions of paragraph 1, to wit : (1) the existence of a "place of business," i . e ., a facility such as premises; (2) this place of business must be "fixed," i . e ., it must be established at a distinct place with a certain degree of permanence; (3) the carrying on of the business of the enterprise through this fixed place of business. 1 Inasmuch as IC neither has any fixed base of business in the Philippines to which its business profits or income is attributable nor will send its employees for a period that will constitute permanent establishment, IC shall not be deemed to have a permanent establishment in the Philippines to which its income may be attributed to. Likewise, ITPI shall not be considered a dependent agent of IC under paragraph 5 supra as the compensation that IC pays for ITPI's assembly and testing services is set at arm's length. Accordingly, the income of IC under the proposed sale structure shall not be subject to income tax in the Philippines, pursuant to Article 8 in relation to Article 5 of the RP-US tax treaty. ( BIR Ruling No. ITAD-170-02 dated October 2, 2002 ) On the other hand, pursuant to the pertinent provisions of the above Philippine tax treaties with the United States, Japan, China, United Kingdom and The Netherlands, the Intel-Selling Entities also are not deemed as having a permanent establishment in the Philippines because the requirements or conditions of paragraph 1 of Article 5 of respective abovementioned tax treaties defining the term "permanent establishment" are not present. Under the proposed structure, neither of the Intel-Selling Entities will maintain fixed place of business in the Philippines nor will any of them send employees or other personnel in the Philippines for a period that would otherwise constitute a permanent establishment. Moreover, ITPI will not habitually maintain a stock of goods or merchandise from which ITPI may regularly deliver goods or merchandise on behalf of the Intel-Selling Entities, a circumstance that would constitute ITPI a permanent establishment, since the assembled and tested goods sold by IC to the Intel-Selling Entities will stay with ITPI only for a brief period of time long enough for them to be packed and shipped to the customers. In addition, ITPI cannot also be considered a permanent establishment because ITPI does not have the authority to conclude contracts with customers in the name or on behalf of the Intel-Selling Entities and is not deemed a broker nor an agent of the Intel-Selling Entities as the services to be performed by ITPI are limited only to picking, packing and shipping. Accordingly, the income to be derived by the Intel-Selling Entities under the proposed sale structure shall not be subject to income tax in the Philippines. ( BIR Ruling No. ITAD-182-00 dated December 6, 2000 and BIR Ruling No. ITAD-170-02 dated October 2, 2002 ) Whether the sale of goods by IC to the Intel Selling Entities and the sale by the latter to customers located in special economic zones registered with PEZA and SBMA are exempt from VAT The Philippines' Value-Added Tax (VAT) law adheres to the Cross Border Doctrine or the Destination Principle, hence, onus of taxation under our VAT system is in the country where the goods, property or services are destined, used or consumed. For this reason, no VAT shall form part of the cost component of products which are destined for consumption outside of the territorial border of the Philippines. Conversely, those destined for use or consumption within the Philippines shall be subject to the ten percent (10%) VAT. Accordingly, since the goods to be sold by IC to the Intel-Selling Entities, both non-resident corporations, will be sold to PEZA and SBMA-registered enterprises located in Economic Zones, whose sales are ultimately destined for export to foreign, countries, the sales of IC to Intel-Selling Entities and the sales by the latter to PEZA and SBMA registered enterprises, under the proposed sale structure, shall be exempt from VAT. ( VAT Ruling No. 001-00 dated January 6, 2000 ) Whether the sale of goods by the Intel-Selling Entities to customers outside economic zones are considered importation subject to VAT on the part of the importer-customer Republic Act (RA) 7916, as amended by R.A. 8748, otherwise known as "The Special Economic Zone Act of 1995" (PEZA Law), provides that products manufactured by Economic Zone (ECOZONE) registered enterprises are generally to be exported to foreign countries. Nonetheless, Section 26, RA 7916 as implemented by Sec. 2, Rule VIII, PART V of the PEZA Implementing Rules and Regulations, provides, viz : "PART V. Tax Treatment of Merchandise in the ECOZONES "Rule VIII. Tax Treatment of Merchandise in the Restricted Areas of the ECOZONES "xxx xxx xxx." "Section 2. Domestic Merchandise. Domestic Merchandise sent from the restricted areas of the ECOZONES by registered Export or Free Trade Enterprises to the customs territory shall, whether or not combines with or made part of other articles likewise the growth, product or manufacture of the Philippines while in the ECOZONES subject to the internal revenue laws of the Philippines as domestic goods sold, transferred or disposed of for local consumption." Under the above-cited provisions, the sale, transfer or introduction of ECOZONE registered enterprises of products from ECOZONES into the Philippine domestic market, otherwise known as the "Customs Territory" (Sec. 3 (f) R.A. 7916), shall be treated as a "technical importation" into the Philippines by the buyer, in which case, such buyer, rather than the ECOZONE registered enterprise or seller, shall be responsible for the tax imposed. Accordingly, the buyer shall be technically treated as the importer thereof who shall be personally liable for the tax, more particularly to the VAT on importation imposed under Section 107 of the Tax Code of 1997. ( VAT Ruling No. 001-00 dated January 6, 2000 ) Be that as it may, in case the ECOZONE products are purchased by a Board of Investments (BOI)-registered enterprise as raw materials, through a customs bonded manufacturing warehouse, the importation thereof shall be exempt from VAT under Section 4.100-2(a)(5) of Revenue Regulations No. 7-95. This is so because the customs bonded manufacturing warehouse is removed from the jurisdiction of the Philippines customs territory and, therefore, the subject importation is deemed not to have entered the Philippines customs territory and never considered introduced into Philippine Commerce. (VAT Ruling No. 011-98 dated March 4, 1998) Whether the net income derived by ITPI from picking, packing and shipping services to be provided to Intel-Selling Entities will be subject to the normal corporate income tax at 32% tax rate Section 27(A) and (E) of the Tax Code of 1997 provides as follows: "SEC. 27. Rates of Income Tax on Domestic Corporations . "(A) In General. Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under this Title as a corporation, organized in, or existing under the laws of the Philippines; Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). "xxx xxx xxx." "(E) Minimum Corporate Income Tax on Domestic Corporations. "(1) Imposition of Tax. A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year. "xxx xxx xxx." The corporate income tax to be paid by ITPI for the services it renders to the Intel-Selling Entities shall either be the Minimum Corporate Income Tax (MCIT) of two percent (2%) of its gross income as defined by the Tax Code of 1997, or the thirty two (32%) of its taxable income, whichever is higher. For this purpose, the comparison between the normal income tax payable by the corporation and the MCIT shall be made at the end of the taxable year. It is noteworthy that the foregoing rule shall apply to ITPI notwithstanding ITPI, being a PEZA-registered enterprise, is subject to the five percent (5%) tax on its gross income from its registered activities under the PEZA law. This is because the PEZA registration of ITPI pertains only to the assembly and testing of microprocessor electronic integrated circuits (PENTIUM) and does not cover income derived from picking, packing and shipping services rendered to the Intel-Selling Entities. Whether the sale of picking, packing and shipping services by ITPI to the Intel-Selling Entities is subject to zero percent (0%) VAT Section 108 of the Tax Code of 1997 provides, viz : "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties . "(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. xxx xxx xxx "(B) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate; "(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); "(2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); "xxx xxx xxx." Based on the foregoing provisions, services rendered by a VAT-registered person shall be subject to zero percent (0%), VAT rate if the following requisites concur: (1) the services rendered by the VAT-registered person are the processing, manufacturing, or repacking of goods, (2) such goods are subsequently exported, (3) such services are performed for other persons doing business outside the Philippines, and (4) such services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP (Section 108(B)(1) of the Tax Code of 1997); and if, pursuant to Section 108(B)(2) of the same Code, the services rendered by the VAT-registered person are other than the processing, manufacturing, or repacking of goods and such services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. The services to be rendered by ITPI fall under the above-mentioned provisions of the Tax Code of 1997. It is noteworthy that although some of the goods are sold to Philippine residents located in ECOZONES, the same are deemed "subsequently exported" since products manufactured or produced within the ECOZONES are destined for export to other countries. Accordingly, the supply of the above services which constitute picking, packing and shipping for and on behalf of the Intel-Selling Entities by ITPI are zero-rated for VAT purposes. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed or discovered that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. cADTSH Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service Footnotes 1. Paragraphs 12 & 2, Commentary on Article 5 (Permanent Establishment), Model Tax Convention On Income and Capital, June 1998, Condensed Version OECD 1998