ITAD Ruling No. 190-02

October 25, 2002 ITAD RULING NO. 190-02 RP-US, Article 5 & 8 NIRC, Sec. 180 BIR Ruling No. 198-87 BIR Ruling No. DA-ITAD-37-02; 67-02 Philips Semiconductor Phils., Inc. Calamba Plant 9 Mountain Drive, Light Industry and Science Park II Barangay La Mesa, Calamba, Laguna Attention: Castello Ooi Manager, Finance and Administration Calamba Plant-IC Factory Gentlemen : This refers to your letters dated August 8 and 16, 2002 requesting confirmation of your opinion that payments made by your company, Philips Semiconductors Phils., Inc. (PSPI), to Amkor Technology, Ltd. (Amkor USA) are exempt from Philippine income tax and, consequently, to withholding tax pursuant to the RP-US tax treaty. It is represented that Amkor USA is a non-resident foreign corporation duly organized and existing under the laws of the United States of America with principal office address at 2711 Centerville Road, Ste. 400, Wilmington Delaware, 19808; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated August 9, 2002; that PSPI is a corporation duly organized and existing under Philippine laws and is engaged in the business of manufacturing discretes; that Philips Singapore (PS) is a non-resident foreign corporation duly organized and existing under the laws of Singapore with principal address at 620A, Lorong 1 Toa Payoh TP2, Level 2, Singapore 319762; that PS is the regional office which oversees the operations of the integrated circuit factories in Thailand, Taiwan and of PSPI in the Philippines (Assembly and Test Organizations in Asia Pacific Region); that PS is also responsible in the negotiation of prices with ATO major suppliers including subcontractoring for the assembly of integrated circuits; that Amkor Technology Euroservices (Amkor Europe) is a nonresident foreign corporation duly organized and existing under the laws of France with principal office address at B.P. 99.13. Chemin du Levant, 01210 Ferney-Voltaire, France; that Amkor Europe is the sales office of Amkor Group of Companies and is responsible to find and deal with customers; that PS and Amkor USA, through Amkor Europe acting as the agent of the latter, entered into an Agreement whereby Amkor USA undertakes to do assembly of the integrated circuit (IC) products for PS; that Amkor USA, in turn, subcontracted the assembly of ICs to Amkor Philippines (AP); that pursuant to the Agreement, PSPI will supply the wafer to AP which does the sawing and backgrinding of the wafer; that AP will also supply other direct materials such as leadframe, mold compound and die attach materials necessary for the assembly of IC; that after the assembly process, AP delivers the IC products to PSPI for final testing; that after the final testing, PSPI exports the IC to Philips affiliates abroad; that Amkor USA will send a sales invoice to PSPI (for the assembly, sawing, and backgrinding price) which will be the basis for payment via electronic to Amkor USA; and that no employees of Amkor USA are involved in the assembly of IC of AP in the Philippines. STIHaE In reply, please be informed that Article 8 of the RP-US tax treaty provides as follows: "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" In this connection, Article 5 of the same treaty provides, viz: ''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 periods aggregating more than 183 days. (emphasis supplied) DAHCaI "xxx xxx xxx" (8) The fact that a corporation of one of the Contracting States controls or is controlled by or is under common control with (a) A corporation of the other Contracting State or (b) A corporation which carries on business in that other Contracting State (whether through a permanent establishment or otherwise) shall not be taken into account in determining whether the activities or fixed place of business of either corporation constitutes a permanent establishment of the other corporation. "xxx xxx xxx" Based on the aforequoted provisions, it is clear that if a corporation which is a resident of the United States of America does not carry on business in the Philippines through a permanent establishment situated therein, the profits of the same shall not be subject to Philippine income tax. For this purpose, a corporation which is a resident of the United States may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services by such corporation, through its employees or other personnel, in the same or connected project, continue within the Philippines for a period exceeding in the aggregate 183 days. Furthermore, the fact that a domestic corporation is controlled by or is under common control with a US corporation shall not be taken into account in determining whether the activities or fixed place of business of domestic corporation constitutes a permanent establishment of the latter. Considering that Amkor USA subcontracted the assembly of IC to AP such that the actual assembly services are performed in the Philippines by AP and not by Amkor USA nor by any of its personnel, Amkor USA is not deemed to have a permanent establishment in the Philippines to which its business profits may be attributed to. Moreover, AP, a corporation with a separate and distinct personality, although a subsidiary of Amkor USA which may exercise some control over AP, cannot be considered a permanent establishment of the latter since such fact alone shall not be taken into account in determining whether the activities or fixed place of business of AP constitutes permanent establishment of Amkor USA. Therefore, this Office is of the opinion and so holds that the payments by PSPI to Amkor USA are not subject to Philippine income tax pursuant to Article 8 (1) in relation to Article 5 of the RP-US tax treaty. (BIR Ruling No. 198-87 dated July 10, 1987; BIR Ruling No. DA-ITAD-37-02 dated April 02, 2002 and BIR Ruling No. DA-ITAD-67-02 dated April 24, 2002) SDATEc 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service