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Tuesday, March 15, 2005
When a warehouse is not permanent establishment
Under the Philippines-Japan tax treaty, business profits of a Japanese company derived in the Philippines shall be subject to Philippine income tax if the Japanese company has a permanent establishment, such as a warehouse, in the country.
A warehouse is considered a permanent establishment only if the business of a non-resident foreign company is wholly or partly carried on through it. Hence, the Japanese company shall not be deemed to have a permanent establishment in the Philippines if it uses a warehouse under a “Just-in-Time” Inventory System Agreement (JIT). (BIR Ruling DA-ITAD 132-04, Nov. 16, 2004)
Under the JIT agreement, the Japanese company delivers raw materials to a warehouse owned by a Philippine company and recognizes a sale only upon withdrawal by the Philippine company of the materials from the warehouse for use in production.
It is clear that the use of the warehouse is for the benefit of the Philippine company and not for the purpose of establishing a fixed place through which the business of the Japanese company can be carried on. Hence, profits generated by the Japanese company from the sale of raw materials to the Philippine company under the JIT agreement shall not be taxable in the Philippines.
(Source: Punongbayan & Araullo)
(March 15, 2005 issue)
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