ITAD BIR Ruling No. 021-11

January 21, 2011 ITAD BIR RULING NO. 021-11 Arts. 7 & 5, Philippines-Thailand tax treaty Ramon F. Garcia & Company Certified Public Accountants 30/F Burgundy Corporate Tower 252 Sen. Gil Puyat Avenue Makati City Attention: Mr. Josefino F. Garcia Partner Gentlemen : This refers to your letter dated October 29, 2008, requesting confirmation that the service fees to be paid by Bombardier Transportation Philippines, Inc. (BTPI-Philippines) (formerly Daimler Chrysler Rail Systems, Philippines) to Bombardier Transportation Signal (Thailand) Ltd. (BTS-Thailand) are not subject to Philippine income tax pursuant to the Philippines-Thailand tax treaty. cDTHIE It is represented that BTS-Thailand is liable to tax in Thailand and is registered for tax purposes as evidenced by the Certificate dated June 4, 2010 issued by the Bangkok Office for Registry of Company and Partnership; that its business address is at Manorom Building, 6th Floor, number 3354/16-19 Rama 4 Road, Klongton Sub-District, Klongtoey District, Bangkok 10110; that it is not registered either as a corporation or as a partnership in the Philippines as confirmed by the Certification of Non-Registration of Corporation/Partnership dated October 17, 2008 issued by the Securities and Exchange Commission; that BTPI-Philippines is a domestic corporation with principal business address at Unit 504 Richmonde Plaza cor. Lourdes St., and San Miguel Ave., Ortigas Center, Pasig City; that it is engaged primarily in the maintenance and distribution of vehicles, machineries and equipment for railways and other rail and transportation systems, and performs all activities as commercial agent for such products. It is further represented that on January 1, 2007, BTS-Thailand and BTPI-Philippines entered into a Service Agreement (Agreement) , wherein BTS-Thailand undertook to provide advice and assistance with regard to some or all of the following services, and any other services which BTS-Thailand may be in a position to provide from time to time: All training and re-training; Assist in personnel selection before hiring; Training materials; Technical support in the form of but not limited to electronic mail, telephone conference, consultation and when necessary to send technical assistance to Philippines which will not exceed 183 days stay over each of one (1) calendar year. That BTS-Thailand may use subcontractors, consultants or other agents or agencies for the purpose of providing the covered services to BTPI-Philippines ; that the term of the Agreement shall be three (3) years from the date of January 1, 2007 and in case of the Main Contract is granted for extension, the Agreement shall be automatically extended equivalent to the term of the Main Contract; that in consideration for the services to be performed by BTS-Thailand to BTPI-Philippines, the former shall charge the latter, as service fee, THB1,023.81 per hour for minimum of 160 hours per month; that the service fee shall be paid in US Dollar currency (US$) at the exchange rate equivalent to THB33.96 = US$1; that regardless of the actual hours per month for services, BTPI-Philippines guarantees to pay the minimum service fee per month of US$4,824.16 and any excess shall be charged based on the given rate; and that the issue or transaction subject of the above application is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal. aEcSIH In reply, please be informed that the Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies in general. It provides: "Section 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "Section 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. SDITAC xxx xxx xxx" Thus, you invoke the provisions of the Philippines-Thailand tax treaty. Article 7 of the Philippines-Thailand tax treaty provides: "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. xxx xxx xxx" Based on the foregoing, the profits of a Thailand enterprise shall be taxable only in Thailand unless such enterprise carries on business in the Philippines through a permanent establishment situated therein. If the Thailand enterprise carries on business as aforesaid, the profits of such enterprise may be taxed in the Philippines but only so much of them as is attributable to that permanent establishment. Applying this to the instant case, the service fees received by BTS-Thailand for the services rendered in the Philippines shall be taxable in the Philippines only if it has a permanent establishment in the Philippines in connection with the activities giving rise to such income. In relation thereto, Article 5 of the Philippines-Thailand tax treaty provides: "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. xxx xxx xxx" Inasmuch as it is represented that the Agreement shall continue until terminated by either party, the whole of such Agreement , including its continuance, upon its automatic renewal, shall be regarded as being the "same or connected project" for the purpose of counting the aggregate period of 183 days. In other words, the 183 day period shall be counted based on the total number of days the services are rendered in the Philippines upon the effectivity of the subject Agreement , including all periods resulting from its automatic renewal. Accordingly, for as long as the employees or personnel of BTS-Thailand do not stay in the Philippines for a period or periods aggregating more than 183 days in the course of their rendition of services to BTPI-Philippines for the "same or connected project", then BTS-Thailand is deemed not to have a permanent establishment in the Philippines to which payment of the service fees may be attributed to and therefore, exempt from Philippine income tax. Moreover, the fees paid for the services rendered for BTPI-Philippines within the Philippines are, however, subject to the applicable rate of value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997, as amended. acSECT Accordingly, BTPI-Philippines , being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the final VAT on such fees before making any payment to BTS-Thailand. In remitting the VAT withheld, BTPI-Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from BTPI-Philippines if it is VAT-registered taxpayer. In addition, it is required to issue in quadruplicate the relevant Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for BTS-Thailand and the fourth copy for BTPI-Philippines as its file copy. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002) This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue