Remittance of Sales Commissions to Non-Resident Foreign Corporation Not Subject to Income Tax

February 5, 1998 BIR RULING NO. 011-98 28 (b) (6)-000-00-011-98 Sycip Gorres Velayo & Co. 3rd Floor Insular Life Building Corner Gorordo and Gen. Maxilom Avenue Cebu City Attention: Atty . Lauris L . dela Pea Tax Division Gentlemen : This refers to your letter dated January 5, 1997 requesting on behalf of your client, Marine Colloids (Philippines), Inc. (MARCOL) for confirmation of your opinion that its remittance of sales commissions to Wang Chemical Co., Ltd. (WANG), a non-resident foreign corporation with principal office in the Kingdom of Thailand is not subject to Philippine income/withholding tax in accordance with the provisions of the Tax Code and the RP-Thailand Tax Treaty. It is represented that MARCOL is a domestic corporation organized and existing under the laws of the Republic of the Philippines with principal office at Looc, Mandaue City; that WANG is a non-resident foreign corporation organized and existing under the laws of Thailand with principal office at 707-709 Rama 6 Road, Patumwan, Bangkok 10330 Thailand; that MARCOL is a manufacturer and exporter of semi-refined carrageenan; that to further market its products, it entered into a Sales Representative Agreement with WANG for the development, promotion, sale and service of MARCOL's products solely within the territorial jurisdiction of Thailand; and that in consideration thereof, MARCOL shall pay sales commissions to WANG at the rate of five percent (5%) computed on the net amount of the invoice price for MARCOL'S products sold in Thailand. cdll In reply, please be informed that Article 5 of the RP-Thailand Tax Treaty provides as follows: " Article 5 PERMANENT ESTABLISHMENT "1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of the enterprise is wholly or partly carried on. "2. The term "permanent establishment" includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; (g) a building site or construction project where such site or project continues for a period of more than six months; (h) an assembly or installation project which exists for more than three (3) months; (i) premises used as sales outlet; (j) a warehouse, in relation to a person providing storage facilities for others; (k) 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 aggregating more than 183 days." Moreover, Article 7 of the said treaty provides, viz.: " 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." (emphasis supplied) Considering that the obligations of WANG to develop, promote and sell MARCOL's products under the Sales Representative Agreement will be rendered entirely in Thailand and since WANG has neither such permanent establishment in the Philippines nor any income that may be derived herein, the sales commissions received by WANG in consideration thereof are not considered as income from sources within the Philippines. Accordingly, said income is not subject to income/withholding tax pursuant to Section 28(b)(6) of the Tax Code, as amended. LLpr This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue