ITAD Ruling No. 062-04

June 15, 2004 ITAD RULING NO. 062-04 Articles 5 & 7, Philippines-Japan Tax Treaty BIR Ruling No. ITAD 187-02 Aranas Consunji Barleta Unit 106 G/F Le Metropole Building 326 Tordesillas cor. De la Costa Sts., Salcedo Village, Makati City 1226 Attention: Jesus Clint O. Aranas Gentlemen : This refers to your letter dated April 29, 2004, on behalf of your client, EPSON PRECISION (PHILIPPINES), INC., (EPPI), requesting confirmation of your opinion that the sale of goods by a foreign supplier, ICHIJO ELECTRONICS CO. LTD. (ICHIJO), to EPPI under a proposed "Vendor Management Inventory Agreement" (VMIA) shall not be taxable in the Philippines. It is represented that ICHIJO is a nonresident foreign corporation duly organized and existing under the laws of Japan with office address at 11-5-1205 Tomihisacho Shinjuku-ku, Tokyo 162-0067; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification dated March 30, 2004 issued by the Securities and Exchange Commission; that EPPI is a Philippine Economic Zone Authority (PEZA)-registered enterprise under Certificate of Registration No. 95-18 dated February 9, 1995; that in order to adequately manage the inventory level of raw materials to be purchased from ICHIJO, EPPI entered into a VMIA with ICHIJO whereby the latter will deliver raw materials to EPPI's warehouse but sales will be recognized only upon actual withdrawal of such raw materials by EPPI for production purposes; that EPPI will in turn not recognize as its inventories the raw materials stored in its warehouse until actual withdrawal for production purposes are made. In reply, please be informed of the pertinent provisions of Article 5 and Article 7 of Philippines-Japan tax treaty which provide, viz : "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' includes specially but is not limited to: xxx xxx xxx a) a warehouse; xxx xxx xxx" In relation thereto, Article 7 of the same tax treaty also provides: "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 or has carried 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" It is clear from the aforequoted provisions that the business profits to be derived by ICHIJO in the Philippines from the sale of raw materials to EPPI shall be taxable in the Philippines if ICHIJO has a permanent establishment situated therein and only so much of them as is attributable to that permanent establishment. A warehouse is considered a permanent establishment if the business of an enterprise of one of the Contracting States is wholly or partly carried on through it. In the instant case, the subject warehouse is being utilized by its owner, EPPI, for storing raw materials delivered by ICHIJO in accordance with the VMIA. As represented, ICHIJO will deliver raw materials to EPPI's warehouse but sales will be recognized only upon actual withdrawal of such raw materials by EPPI for production purposes. Based on this arrangement, it is clear that the use of the warehouse is for the benefit of EPPI and not for the purpose of establishing a fixed place through which the business of ICHIJO is to be wholly or partly carried on. If any, the relation between the warehouse and ICHIJO under the arrangement is merely to attain the ultimate objective of carrying out the provisions of the VMIA. In view of the foregoing, the business profits to be derived by ICHIJO in the Philippines from the sale of raw materials to EPPI are not taxable in the Philippines since ICHIJO does not maintain a permanent establishment in the Philippines to which its profits as such may be attributed. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. EHSTcC Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service