Isla Lipana and Co.

May 25, 2021 ITAD BIR RULING NO. 018-21 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines-Thailand tax treaty Isla Lipana and Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: AAA _______________ Gentlemen : This refers to your tax treaty relief application that was filed on January 19, 2010 requesting confirmation that the service fees paid by Mead Johnson Nutrition (Philippines), Inc. ("Mead Johnson PH") to Mead Johnson Nutrition (Thailand) Ltd. ("Mead Johnson TH") are exempt from income tax pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the Kingdom of Thailand for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Thailand tax treaty"). HTcADC FACTS Mead Johnson TH is a foreign corporation organized and existing under the laws of Thailand and a resident thereof based on its Certificate of Residence issued by the Revenue Department of Thailand. It operates in the dairy product (except frozen) manufacturing industry. 1 It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission. On the other hand, Mead Johnson PH is a domestic corporation which manufactures and sells nutritional needs of infants, children and persons with rare diseases. 2 On January 1, 2009, Mead Johnson PH and Mead Johnson TH entered into a Service Agreement whereby Mead Johnson TH agreed to provide administrative and managerial support services to Mead Johnson PH, particularly: a) marketing, sales, promotional and distribution planning and techniques, and information on sales trends, competitive products and Mead Johnson PH's market shares in the country it operates, and market research; b) development of financial plans and strategic investment policies, assistance in the establishment of banking relations and efficient investment management; c) advice to manage Mead Johnson PH's internal administration and recommendation to improve its management and administration systems, organization structure, organization and management planning, and corporate and legal policy matters; and d) guidance on human resource policies, including remuneration and related matters, employee recruitment, training, development and appraisal. In consideration, Mead Johnson PH will pay Mead Johnson TH a service fee equal to the cost of services plus mark-up of five percent (5%). The fee is computed quarterly and payable within thirty (30) days from receipt of invoice. The Service Agreement took effect on January 1, 2009, for a term of three years or until December 31, 2011. Based on the certifications issued by Mead Johnson PH on December 17, 2010 and June 26, 2012, the following personnel of Mead Johnson TH performed the agreed services in the Philippines during the term of the Service Agreement: Personnel Inclusive Dates BBB ________________ ________________ CCC ________________ ________________ ________________ ________________ DDD ________________ ________________ EEE ________________ ________________ FFF ________________ ________________ GGG ________________ ________________ ________________ HHH ________________ ________________ ________________ ________________ ________________ III ________________ ________________ ________________ JJJ ________________ ________________ KKK ________________ LLL ________________ ________________ MMM ________________ ________________ ________________ ________________ ________________ ________________ ________________ ________________ ________________ MMM ________________ ________________ ________________ ________________ ________________ ________________ ________________ ________________ ________________ NNN ________________ ________________ ________________ ________________ OOO ________________ ________________ ________________ ________________ PPP ________________ ________________ ________________ QQQ ________________ ________________ RULING In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, income derived by a foreign corporation not engaged in trade or business is subject to income tax at the rate of 30%, to wit: " SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General . Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c) and (d) above: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." CAIHTE However, under Section 32 (B) (5) of the Tax Code, such income is exempt to the extent required by any treaty obligation binding upon the Philippine government, to wit: " SEC. 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." For this purpose, paragraph 1, Article 7 and paragraphs 1 and 2, Article 5 of the Philippines-Thailand tax treaty provide: " 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." " 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 months; i) premises used as a 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 or periods aggregating more than 183 days." Under Article 7, 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 business as such, the profits may be taxed in the other State but only so much of them as are attributable to the permanent establishment. Under Article 5, a permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on, and includes especially, a place of management, a branch, an office, a factory, and a workshop. A permanent includes also the furnishing of services which continues for a period or periods aggregating more than 183 days. In this case, Mead Johnson TH performed the agreed services in the Philippines through its employees for only 151 days, to wit: Personnel Inclusive Dates Number of Days 2009 QQQ ________________ 2 EEE ________________ 5 FFF ________________ 3 MMM ________________ 3 MMM ________________ 2 CCC ________________ 3 OOO ________________ 5 MMM ________________ 2 MMM ________________ 5 CCC ________________ 1 CCC ________________ 3 DDD NNN LLL ________________ 1 FFF NNN ________________ 2 LLL FFF PPP FFF ________________ 1 MMM ________________ 5 BBB ________________ 2 NNN ________________ 2 GGG OOO ________________ 3 NNN ________________ 2 MMM ________________ 2 NNN ________________ 4 TOTAL 58 2010 MMM ________________ 4 PPP PPP ________________ 1 MMM ________________ 1 MMM ________________ 3 MMM ________________ 2 FFF ________________ 3 PPP ________________ 2 CCC ________________ 3 MMM ________________ 3 NNN ________________ 3 KKK ________________ 3 MMM ________________ 3 CCC ________________ 3 JJJ III ________________ 1 III NNN ________________ 1 QQQ HHH III ________________ 3 NNN QQQ DDD ________________ 6 HHH ________________ 2 HHH ________________ 3 III ________________ 3 PPP MMM ________________ 2 HHH ________________ 3 JJJ ________________ 1 JJJ HHH ________________ 3 DDD HHH ________________ 1 DDD DDD ________________ 1 MMM ________________ 3 PPP ________________ 3 TOTAL 70 2011 MMM ________________ 4 III ________________ 3 III ________________ 3 MMM ________________ 4 III ________________ 4 MMM ________________ 5 TOTAL 23 GRAND TOTAL 151 Accordingly, since Mead Johnson TH is not engaged in trade or business in the Philippines, does not have a branch, an office or other fixed place of business in the Philippines, and did not furnish services in the Philippines for more than 183 days, but for 151 days only during the term of the Service Agreement from 2009 to 2011, Mead Johnson TH is not deemed to have a permanent establishment in the Philippines under paragraphs 1 and 2, Article 5 of the Philippines-Thailand tax treaty. Therefore, the service fees paid by Mead Johnson PH to Mead Johnson TH for such services rendered are exempt from income tax pursuant to paragraph 1, Article 7 of the tax treaty. However, the service fees for such services performed in the Philippines are subject to value-added tax ("VAT") under Section 108 (A) of the Tax Code, to wit: " SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%) . . . " The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration. . ." Pursuant to Section 4.114-2 of Revenue Regulations No. 16-2005, 3 as amended, Mead Johnson PH shall withhold VAT on the service fee at the rate of 12% before remitting it to Mead Johnson TH. Mead Johnson PH shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed form and its accompanying proof of payment shall serve as documentary substantiation for Mead Johnson PH's claim of input VAT on the fee. The VAT withheld shall be remitted within ten (10) days following the end of the month the withholding is made. DETACa This ruling is issued on the basis of the facts as represented. However, if it will be disclosed upon investigation that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. https://www.emis.com/php/company-profile/TH/Mead_Johnson_Nutrition_Thailand_Ltd_en_2108871.html 2. http://pana.com.ph/directories/mead-johnson-nutrition-phils-inc/ 3. Consolidated Value-Added Tax Regulations of 2005.