Tax notes: Tax treatment of JIT treaty

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Monday, January 6, 2014


THE income from the sale of raw materials (magnetic heads for hard disk drives) by a foreign corporation organized and existing under the law of China to a domestic corporation under the just-in-time (JIT) inventory arrangement is not subject to 30 percent final withholding tax under the Philippine-China Tax Treaty.

Under the JIT arrangement, the nonresident foreign corporation shall deliver the raw materials to the warehouse of the domestic corporation on a regular basis. Sales will only be recognized by the nonresident foreign corporation and the corresponding invoice shall only be issued to the domestic corporation upon withdrawal of the goods from the warehouse. On the other hand, the domestic corporation will recognize as its inventories the raw materials stored in the warehouse until it is actually withdrawn for production purposes. The payment for the products shall be in US dollars through telegraphic transfer, which shall be made by the domestic corporation no later than 60 days from the end of each month in which the delivery was made.

Since the nonresident foreign corporation does not maintain a permanent establishment (e.g., branch, office, factory) in the Philippines, the business profit received by the latter from the sale of raw materials to the domestic corporation are exempt from income tax pursuant to the Philippine-China Tax Treaty (BIR Ruling No. ITAD 310-13, Nov. 18, 2013).

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On the other hand, the sale of raw materials to the domestic corporation is subject to value added tax (VAT) under Section 106(A) of the Tax Code. The domestic corporation, being the resident withholding agent, shall withhold 12 percent final VAT and remit the same using BIR Form 1600. The duly filed BIR Form 1600 shall serve as the domestic company’s documentary substantiation for its claim of input tax upon filing its own VAT return.

Published in the Sun.Star Cebu newspaper on January 07, 2014.

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