Thai Airways International Public Company Ltd.

July 15, 2020 ITAD BIR RULING NO. 058-20 Articles 5 (Permanent Establishment), 8 (Shipping and Air Transport) and 11 (Dividends) of the Philippines-Thailand tax treaty Thai Airways International Public Company Ltd. Country Space 1 Building Sen. Gil Puyat Avenue 1200 Makati City Attention: AAA _______________ Gentlemen : This refers to your application for tax treaty relief dated October 26, 2011 requesting confirmation that Thai Airways International Public Company Ltd. ("Thai Airways") , previously known as Thai Airways International Ltd. , is subject to income tax at the rate of 1 1/2 percent on its Gross Philippine Billings and is exempt from branch profits remittance 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") . It is represented that Thai Airways is a foreign corporation duly organized and existing under the laws of Thailand and a resident thereof based on its Memorandum and Articles of Association as well as its Certificate of Residence issued by the Revenue Department of Thailand; that Thai Airways is a public company engaged in the transportation by air of persons, property and mail, and in other related activities; that it is licensed to transact business in the Philippines through a branch office based on the license granted to it by the Securities and Exchange Commission; that its branch office, Thai Airways International Public Company Limited-Philippine Branch Office ("Thai Airways PH-Branch") , is licensed to engage in commercial transportation by air of passengers, cargo and post mail in the Philippines. It is further represented that 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, per certificate of no pending case issued by Thai Airways PH-Branch . In reply, please be informed that under Section 28 (A) (3) (a) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, 1 Thai Airways , an international air carrier engaged in trade or business in the Philippines through its branch office, is subject to income tax at the rate of 2 1/2 percent on its Gross Philippine Billings, thus: " SEC. 28. Rates of Income Tax on Foreign Corporations . (A) Tax on Resident Foreign Corporations . xxx xxx xxx (3) International Carrier. An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on its 'Gross Philippine Billings' as defined hereunder: AIDSTE xxx xxx xxx (a) International Air Carrier. 'Gross Philippine Billings' refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo, and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight which originates from the Philippines, but transshipment of passenger takes place at any part outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings. xxx xxx xxx Provided, That international carriers doing business in the Philippines may avail of a preferential rate or exemption from the tax herein imposed on their gross revenue derived from the carriage of persons and their excess baggage on the basis of an applicable tax treaty or international agreement to which the Philippines is a signatory or on the basis of reciprocity such that an international carrier, whose home country grants income tax exemption to Philippine carriers, shall likewise be exempt from the tax imposed under this provision. xxx xxx xxx" Relative thereto, Article 8 (Shipping and Air Transport) of the Philippines-Thailand tax treaty provides: " Article 8 SHIPPING AND AIR TRANSPORT 1. Profits derived by an enterprise of a Contracting State from the operation in international traffic of ships or aircraft shall be taxable in that State. 2. Notwithstanding the provisions of paragraph 1, profits from sources within a Contracting State derived by an enterprise of the other Contracting State from the operation of ships or aircraft in international traffic may be taxed in the first-mentioned State but the tax so charged shall not exceed the lesser of a) one and one-half per cent of the gross revenues derived from sources in that State; and b) the lowest rate of Philippine tax that may be imposed on profits of the same kind derived under similar circumstances by a resident of a third State." Under paragraph 2 of Article 8, profits derived from sources within the Philippines by an enterprise of Thailand from the operation of aircraft in international traffic may be taxed in the Philippines at the rate of (a) 1 1/2% of its gross revenues or (b) the lowest rate of income tax that may be imposed by the Philippines on such profits derived under similar circumstances by a resident of a third State ("most favored nation treatment") , whichever is lesser. AaCTcI Since the Philippines has not granted a most favored nation treatment to any international air carrier of a third State, Thai Airways should be taxed at a maximum of 1 1/2% of its gross revenues pursuant to paragraph 2 (a), Article 8 of the Philippines-Thailand tax treaty. With respect to the branch profits remittance tax, nothing in the tax treaty prevents the Philippines from imposing tax on the profits remitted by a branch to its head office abroad, thus: " Article 11 DIVIDENDS 7. Nothing in this Convention shall be construed as preventing a Contracting State from imposing a tax on the profits or any other sum which was set aside from profits or which may be regarded as profits remitted or disposed of by a permanent establishment of a company which is a resident of the other Contracting State, in addition to the ordinary corporate income tax which is chargeable against the profits of the said permanent establishment." (Emphasis ours) Contrary to your argument that the 1 1/2% income tax on Gross Philippine Billings is in lieu of all income tax liabilities of Thai Airways PH-Branch , a plain reading of the above provision shows that the treaty likewise allows the Philippines to impose branch profit remittance tax on the total profits applied or earmarked by a permanent establishment of a Thai enterprise for remittance abroad. As the provision is clear, plain, and free from ambiguity, it must be given its literal meaning and applied without any other interpretation. As to whether Thai Airways PH-Branch constitutes a permanent establishment of Thai Airways in the Philippines, paragraphs 1 and 2, Article 5 of the Philippines-Thailand tax treaty are enlightening: " 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 ;" (Emphasis ours) Based on the foregoing provision, it is clear that Thai Airways PH-Branch is a permanent establishment of Thai Airways in the Philippines. Accordingly, the branch profits it remitted to its head office in Thailand are subject to 15% branch profits remittance tax under Section 28 (A) (5) of the Tax Code: " SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporations. (5) Tax on Branch Profits Remittances. Any profit remitted by a branch to its head office shall be subject to a tax of fifteen percent (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: Provided, that interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages, premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines." EcTCAD Finally, being an international air carrier, Thai Airways is also subject to 3% common carrier's tax under Section 118 (A) of the Tax Code, as amended by Republic Act No. 10378, 2 thus: "(A) International air carriers doing business in the Philippines on their gross receipts derived from transport of cargo from the Philippines to another country shall pay a tax of three percent (3%) of their quarterly gross receipts." It is noteworthy to mention that Paragraph 4.4 of Revenue Regulations (RR) No. 15-2013 3 provides, to wit: "4.4) Taxability of Income Other Than Income from International Transport Services. All items of income derived by international carriers that do not form part of Gross Philippine Billings as defined under these Regulations shall be subject to tax under the pertinent provisions of the NIRC, as amended. xxx xxx xxx" Hence, all other types of income of Thai Airways which do not form part of its Gross Philippine Billings shall be subject to income tax under the regular rate. All told, this Office is of the opinion and so holds that: (1) Thai Airways is subject to the following: (a) 1 1/2% tax on its Gross Philippine Billings pursuant to paragraph 2(a), Article 8 of the Philippines-Thailand tax treaty; (b) 3% common carrier's tax on the transport of cargo pursuant to Section 118(A) of the Tax Code; and (c) Regular tax rate imposed under the pertinent provisions of the Tax Code on all items of income which do not form part of its Gross Philippine Billings. (2) Thai Airways PH-Branch is subject to 15% branch profits remittance tax pursuant to Section 28(A)(5) of the Tax Code. 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 Footnotes 1. Amended by Republic Act No. 10378. 2. An Act Recognizing the Principle of Reciprocity as Basis for the Grant of Income Tax Exemptions to International Carriers and Rationalizing other Taxes Imposed thereon by Amending Sections 28 (A) (3) (A), 109, 118 and 236 of the National Internal Revenue Code (NIRC), as amended, and for other Purposes. 3. Revenue Regulations Implementing Republic Act No. 10378 entitled "An Act Recognizing the Principle of Reciprocity as Basis for the Grant of Income Tax Exemptions to International Carriers and Rationalizing other Taxes Imposed thereon by Amending Sections 28 (A) (3) (A), 109, 118 and 236 of the National Internal Revenue Code (NIRC), as amended, and for other Purposes."