Punongbayan & Araullo

March 27, 2018 ITAD BIR RULING NO. 051-18 Articles 5 and 7, Philippines- Thailand tax treaty Punongbayan & Araullo 20th Floor, Tower 1, The Enterprise Center 6766 Ayala Avenue, Makati City Attention: AAA __________ Gentlemen : This refers to your tax treaty relief application filed on March 30, 2011 requesting confirmation that the services fees paid or to be paid to CHC South East Asia Co., Ltd. (" CHC ") by Canadian Helicopters Philippines International, Inc. (" Canadian Helicopters "), being in the nature of business profits are not subject to income tax in the Philippines 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 "). DEIHAa It is represented that CHC is a foreign corporation duly organized and existing under the laws of Thailand per its Certificate of Residence issued by the Regional Revenue Office 1 of The Revenue Department, Bangkok, Thailand; that it is not registered as a corporation or as a partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission; and that Canadian Helicopters , on the other hand, is a domestic corporation duly organized and existing under Philippine laws. It is further represented that CHC and Canadian Helicopters entered into a Service Agreement (" Agreement ") whereby CHC shall provide Canadian Helicopters the following services: Economic & Investment Analysis & Research; Marketing; Regional Business Development; Financial Support/Consulting/Services; Prod. Research & Development; Regional Logistic Support; Regional Training; Safety & Quality Support; Operational Supports; Technical Support; Sourcing of Material & Parts support; and Logistic Support. that the Agreement shall take effect from January 1, 2011 and shall continue for a period of twelve (12) months, subject to earlier termination provided in the same Agreement; that in consideration of the services rendered, Canadian Helicopters shall pay CHC service fees which shall be based on the rates specified in the quotation submitted by CHC to Canadian Helicopters from time to time which is calculated on a cost plus basis; and that all services described in the Agreement shall be performed outside the Philippines and that no part of the said services shall be performed in the Philippines per Certification issued by the Operations Manager of CHC . In reply, please be informed that the service fees to be paid to CHC , being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax in the Philippines at the rate of 30 percent of the gross amount thereof. Section 28 (B) (1) of the National Internal Revenue Code (" Tax Code ") of 1997, as amended, provides: " 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, such fees may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines. Section 32 (B) (5) of the Tax Code provides: DcHSEa " 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." Thus, you invoked Article 7 (1) of the Philippines-Thailand tax treaty, to wit : " Article 7 Business Profits 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" In relation thereto, Article 5 of the same 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 specially: xxx xxx xxx 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. AacCIT xxx xxx xxx" Based on the foregoing, the profits of a corporation with permanent business address in Thailand shall be taxable only in that State unless such enterprise carries on business in the Philippines through a permanent establishment situated therein. If the corporation based in Thailand carries on business as aforesaid, the profits of such enterprise may be taxed in the Philippines but only so much of them as are attributable to that permanent establishment. Applying this to the instant case, the service fees received by Canadian Helicopters for 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. Considering that the services rendered by CHC are performed outside the Philippines, CHC is not deemed to have a permanent establishment in the Philippines to which its business profits may be attributed. Such being the case, the service fees paid by Canadian Helicopters to CHC are not subject to Philippine income tax pursuant to Article 7 (1) in relation to Article 5 (1) and (2) (k) of the Philippines-Thailand tax treaty, as amended. 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.) CAESAR R. DULAY Commissioner of Internal Revenue n Note from the Publisher: Copied verbatim from the official document.