Castillo Laman Tan Pantaleon

June 8, 2021 ITAD BIR RULING NO. 027-21 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 Makati City Attention: AAA _______________ Gentlemen : This refers to your tax treaty relief application filed on April 30, 2014 requesting confirmation that the 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 DETACa Prosoft is a foreign corporation organized and existing under the laws of Thailand and a resident thereof based on its Partnership and Company Limited Registration Certificate issued by the Department of Business Development of Thailand and Certificate of Residence issued by the Revenue Department of Thailand. Prosoft 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. Suzuki Philippines is a wholly-owned subsidiary of Suzuki Motor Corporation of Japan. 3 On April 30, 2014, Suzuki Philippines and Prosoft entered into an Agreement for System Engineering Service ("Agreement") whereby Prosoft agreed to provide services and support via internet to Suzuki Philippines for the maintenance of the Enterprise Resource Planning and Business Planning and Control System Software. Prosoft will assign highly skilled and technical professional staff at its office in Thailand who are familiar and knowledgeable with Suzuki Philippines' system. Prosoft will provide 25 hours of services every month for a period of 32 months from May 1, 2014 to December 31, 2016. In consideration, Suzuki Philippines will pay service fee to Prosoft amounting to _____________ for the period May 1 to December 31, 2014; ____________ for the period January 1 to December 31, 2015; and _______________ for the period January 1 to December 31, 2016. In case the services go beyond 25 hours in a month, Prosoft will invoice Suzuki Philippines for the exceeding hours at the rate of $______ per hour for application consultant services and for modification or addition to the software. Based on the Certification of No Personnel issued by Suzuki Philippines on June 6, 2018, no personnel of Prosoft arrived in the Philippines to render services to Suzuki Philippines in connection with the Agreement for the period May 1, 2014 to December 31, 2016, and that all services were conducted offshore. 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: n 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 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 old 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; HEITAD 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 derived in the other Contracting State may be taxed in the other State if the profits are attributable to a permanent establishment which the enterprise has in that other State. 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. In the case of furnishing of services, an enterprise is deemed to have a permanent establishment in the other State if it furnishes services in that State (through employees or other personnel thereof) for a period or periods aggregating more than 183 days. Accordingly, since Prosoft 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 a period or periods aggregating more than 183 days. Prosoft is not deemed to have a permanent establishment in the Philippines under paragraphs 1 and 2, Article 5 of the Philippines-Thailand tax treaty. As represented, Prosoft rendered all services online and outside the Philippines. This being so, the service fee paid by Suzuki Philippines to Prosoft for such services shall be exempt from income tax in the Philippines 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 aDSIHc Under the cross-border or destination principle of the VAT system, services performed in the Philippines are subject to VAT, while those performed outside are exempt. Since the services are performed by Prosoft entirely outside the Philippines, the service fee to be paid to it by Suzuki Philippines shall be exempt from VAT. 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 ..." n Note from the Publisher: Copied verbatim from the official document. The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.