Castillo Laman Tan Pantaleon

May 25, 2021 ITAD BIR RULING NO. 019-21 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines-Thailand tax treaty Castillo Laman Tan Pantaleon and San Jose Law Office 122 Valero Street, Salcedo Village 1227 Makati City Attention: AAA BBB Gentlemen : This refers to your tax treaty relief application filed on April 19, 2011 requesting confirmation that service fee paid by Suzuki Philippines, Inc. (" Suzuki Philippines ") to Prosoft Company Ltd. (" Prosoft ") is exempt from income tax pursuant to the old 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 ,which took effect beginning January 1, 1983 until December 31, 2018 (" old Philippines-Thailand tax treaty "). 1 HEITAD FACTS Prosoft is a corporation organized and existing under the laws of Thailand and a resident thereof based on the Certificates issued by the Department of Business Development of Thailand and the Certificate of Residence issued by the Revenue Department of Thailand. It is engaged in providing software solutions to assist manufacturers and distributors to streamline their operations and deliver measurable returns on their investments in information technology. 2 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, Suzuki Philippines is a domestic corporation engaged in the manufacture and distribution of motorcycles, automobiles, and outboard motors in the Philippines. It is a wholly-owned subsidiary of Suzuki Motor Corporation of Japan. 3 On February 1, 2011, Suzuki Philippines and Prosoft entered into a Three-Year Maintenance Support Commitment and Integrated Development Framework Term License Agreement whereby Prosoft agreed to provide software support services via internet to Suzuki Philippines in relation to the software called BPCS Super Pack and Ogsexa-Power. The software was licensed to Suzuki Philippines by SSA Global Technologies (S) Pte. Ltd. of Singapore under a Software License Agreement. Software support services means current maintenance and support services, and may be referred to in the Agreement as maintenance and support, annual support, support services, on-going support, or one-point support. Prosoft will provide the services from February 1, 2011 to January 31, 2014, and will receive a total service fee from Suzuki Philippines amounting to US$27,061.74. On May 19, 2011, Suzuki Philippines and Prosoft amended the Agreement by increasing the service fee to US$34,708.00, plus an additional service fee amounting to US$60.00 per hour per consultant, or US$60.00 per hour for any modification or add-on to the software, in excess of the allotted 25 hours per month. Prosoft ,through its highly skilled and knowledgeable employees, provided the agreed services via internet during the three-year period. Based on the Certification of No Personnel executed by Suzuki Philippines on March 12, 2018, all services were conducted offshore and there was no physical presence of any personnel of Prosoft in the Philippines. Based on a sworn statement issued by Suzuki Philippines ,the income subject of this ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. 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%)." However, under Section 32 (B) (5) of the Tax Code, such income is exempt to the extent required by any treaty obligation on 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 old Philippines-Thailand tax treaty provide: aDSIHc " 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, Prosoft does not have a branch, office or other fixed place of business in the Philippines and did not furnish services in the Philippines through its employees or other personnel for a period or periods aggregating more than 183 days. Thus, Prosoft ,shall be deemed to not have a permanent establishment in the Philippines to which the profits derived from the provision of services to Suzuki Philippines may be attributable. The service fee paid by Suzuki Philippines is, therefore, exempt from Philippine income tax under paragraph 1, Article 7 of the old Philippines-Thailand tax treaty. Moreover, the service fee is exempt from value-added tax (" VAT ") imposed 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. .." 4 Under the cross-border or destination principle of the VAT system implied above, only services which are performed in the Philippines are subject to VAT, while those performed abroad are exempt. Since the software support services were all performed by Prosoft in Thailand, the service fee paid by Suzuki Philippines for such services is, therefore, exempt from VAT. ATICcS This ruling is issued on the basis of the facts as represented. However, if it shall 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. The renegotiated Philippines-Thailand tax treaty took effect on January 1, 2019 . 2. http://www.proline.co.th/ 3. http://www.suzuki.com.ph/company/ 4. Republic Act No. 10963, otherwise known as the TRAIN (Tax Reform for Acceleration and Inclusion) Law, which took effect on January 1, 2018 ,amends Section 108 (A) as follows: " 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 twelve percent (12%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. 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. .."