ITAD Ruling No. 074-02

May 2, 2002 ITAD RULING NO. 074-02 RP-Japan, Article 5 & 7 BIR Ruling No. DA-ITAD-70-01 Sycip Gorres Velayo & Co. 6th Floor Ayala Life FGU Center Mindanao Avenue cor. Biliran Road Cebu Business Park Cebu City Attention: Lauris L. Dela Pea Tax and Business Advisory Gentlemen : This refers to your letter dated November 20, 2001 requesting for confirmation that the remittance to Tecdia Co., Ltd (TCL) by Cebu Microelectronics, Inc. (CMI) of the proceeds from purchase of equipment is exempt from withholding/income tax in the Philippines pursuant to Article 7(1) of the RP-Japan tax treaty. It is represented that TCL is a corporation organized and existing under the laws of Japan with principal office located at Higashi Ikebukuro 3-Chome, Toshima-Ku, Tokyo; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification dated May 15, 2001 issued by the Securities and Exchange Commission (SEC); that CMI is a corporation organized and existing under the laws of the Philippines with principal office at Mactan Economic Zone, Lapu-lapu City; that TCL and CMI entered into a Contract of Installment Sale whereas TCL consigned various factory equipment, enumerated in the List of Factory Equipment stated in the contract, to be used solely for the manufacturing activities of CMI and in accordance with the rules and regulations of PEZA; and that in consideration for the aforementioned machines, CMI shall pay TCL in the amount of 164,060,000 payable anytime upon CMI's availability of funds. In reply, please be informed that Article 7 of the RP-Japan tax treaty provides as follows: "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" Moreover, Article 5 of the above treaty provides: "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 mine, an oil or gas well, a quarry or other place of extraction of natural resources; "xxx xxx xxx" Based on the aforequoted provisions, it is clear that if a corporation which is a resident of Japan carries on business in the Philippines through a permanent establishment situated therein, the profits of the same shall be subject to Philippine income tax, but only so much of them as is attributable to that permanent establishment. For this purpose, a corporation which is a resident of Japan may be deemed to have a permanent establishment in the Philippines if, among others, it has a store or other sales outlet or a branch, an office, a factory, a workshop or a warehouse in the Philippines. Considering that TCL does not carry on business in the Philippines through a permanent establishment to which its business profits may be attributed to, this Office is of the opinion and so holds that the income derived by TCL from the sale of various equipment to CMI is not subject to Philippine tax pursuant to Article 7(1) in relation to Article 5 of the RP-Japan tax treaty. (BIR Ruling No. DA-ITAD-70-01 dated August 16, 2001) This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service