Manly Plastics, Inc.

June 11, 2020 ITAD BIR RULING NO. 041-20 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines-Thailand Tax Treaty Manly Plastics, Inc. 404 M.H. Del Pilar Street Barangay Maysilo 1477 Malabon City Gentlemen : This refers to your tax treaty relief application filed on May 6, 2019, requesting confirmation that income payments made by Manly Plastics, Inc. ("MPI") to Toyoda Gosei Asia Co., Ltd. ("TGACL") are not subject to Philippine 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") . FACTS TGACL is a corporation organized and existing under the laws of Thailand and a resident thereof for tax purposes based on its Certificate of Registration issued by the Bangkok Partnerships and Companies Registration Office and the Certificate of Residence issued by the Revenue Department of Thailand. TGACL is engaged in the manufacture and sale of automotive parts and other products, and management of sports teams and sports facilities. 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, MPI is a domestic corporation which provides end-to-end plastic product solutions from mold engineering to fabrication, and mass production to decoration. On January 10, 2019, MPI and TGACL entered into a Test and Evaluation Outsourcing Master Agreement whereby TGACL shall provide outsourcing services to MPI for test and evaluation of automotive parts and materials, particularly Toyota Vios Model's interior parts, from October 30, 2017 to December 27, 2017. The Agreement commenced on January 10, 2019 and shall continue for a period of five (5) years, subject to automatic renewal for additional periods of one (1) year each thereafter. In consideration, MPI will pay service fees to TGACL amounting to USD_______________. The service fees shall be paid within 30 days from receipt of the relevant invoice. TAIaHE Based on a certification issued by MPI , all activities were rendered and done entirely by TGACL in Thailand. Based on another certification issued by MPI , the income subject of this request for 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: " 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 interest, 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%)." 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: " 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." In this regard, paragraph 1, Article 7 of the Philippines-Thailand tax treaty provides: " Article 7 BUSINESS PROFITS 1. Income or 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 aforesaid, income or profits of the enterprise may be taxed in the other State but only so much of them as is attributable to: (a) that permanent establishment; or (b) sales in the other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment." Under Article 7, the profits of an enterprise of Thailand shall be taxable only in Thailand, unless it carries on business in the Philippines through a permanent establishment situated therein. If the enterprise carries on business as such, the profits may be taxed in the Philippines to the extent that such profits are attributable to the permanent establishment, among others. For purposes of determining the existence of a permanent establishment, paragraphs 1 and 2, Article 5 of the tax treaty provide: " 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 an 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 or exploration of natural resources; (g) premises used as a sales outlet; (h) a farm or plantation; (i) a warehouse, in relation to a person providing storage facilities for others; (j) a building site, a construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities continue for a period of more than 3 months; (k) the furnishing of services including consultancy services by a resident of one of the Contracting States through employees or other personnel, where 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 6 months within any twelve-month period." TCAScE Based on the foregoing, 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. With respect to rendering of services including consultancy services, an enterprise is deemed to have a permanent establishment if it undertakes such activity within a Contracting State for a period or periods aggregating more than six months within any twelve-month period. Accordingly, since TGACL is not engaged in trade or business in the Philippines to which a fixed place of business, such as an office or a branch, is necessary, and it did not render services in the Philippines for more than six months within any twelve-month period but performed these services entirely outside the Philippines, TGACL is not deemed to have a permanent establishment in the Philippines under paragraphs 1 and 2, Article 5 of the Philippines-Thailand tax treaty. This being the case, service fees paid by MPI to TGACL for the test and evaluation of an automobile's interior part shall be exempt from Philippine income tax under paragraph 1, Article 7 of the tax treaty. Moreover, the service fee is not subject to value-added tax ("VAT") imposed under Section 108 (A) of the Tax Code, which provides: " 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 . . ." 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 test and evaluation of the automobile's interior part were done entirely by TGACL in Thailand, such service fees paid thereto shall be exempt from VAT. This ruling is issued on the basis of the foregoing 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.) CAESAR R. DULAY Commissioner of Internal Revenue