Cesar C. Cruz and Partners Law Offices

October 22, 2018 ITAD BIR RULING NO. 096-18 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines- Thailand tax treaty Cesar C. Cruz and Partners Law Offices 3001 BPI-Philam Life Makati 6811 Ayala Avenue 1227 Makati City Attention: AAA Gentlemen : This refers to your tax treaty relief application filed on September 14, 2016 requesting confirmation that service fees paid by Atlas Fertilizer Corporation ("Atlas") to TTCL Public Company Ltd. ("TTCL") are exempt from 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") . CHcETA FACTS TTCL is a corporation organized and existing under the laws of Thailand and a resident thereof based on its Articles of Association and the Certificate issued by the Ministry of Commerce of Thailand and the Income Tax Payment Certificate issued by the Revenue Department of Thailand. TTCL is a publicly listed company in Thailand, and a joint venture company between Toyo Engineering Corporation of Japan and Italian-Thai Development Public Company Ltd. of Thailand. TTCL is engaged in providing integrated design and engineering, procurement of machinery and equipment, and construction of turnkey projects for industrial and process plants, mainly in energy, petrochemical, chemical and power industries. Based on TTCL 's License to Transact Business in the Philippines with the Securities and Exchange, it is licensed to establish a branch office under the name Toyo-Thai Corporation Public Company Ltd.-Philippines Branch , which was subsequently changed to TTCL Public Company Ltd.-Philippines Branch ("TTCL Philippine Branch") . TTCL Philippine Branch performs procurement and management services required to expand the capacity of the polyethylene plants of JG Summit Petrochemical Corporation ("JG Summit") , without engaging in the practice of engineering and other profession in the Philippines. On the other hand, Atlas is a domestic corporation engaged in the manufacture, distribution and marketing of fertilizers, industrial chemicals and related products. On August 28, 2016, Atlas and TTCL entered into a Cost Estimation Contract where TTCL agreed to provide cost estimation services to Atlas on its nitrogen-phosphorous-potassium fertilizer plant in the Philippines. The project will be completed on October 28, 2016. In consideration, Atlas will pay service fees to TTCL amounting to $ _______________ and payable as follows: 50% on the date of execution of the contract, and the other 50% on the submission of the final report of the project. Based on the Certificate of Final Acceptance issued by Atlas , the work performed by TTCL has been reviewed and found to be complete by Atlas and has received final acceptance from Atlas . Based on the sworn statement issued by Atlas , the following personnel were sent to the Philippines by TTCL to provide services to Atlas : Nationality Position Arrival Departure BBB Japanese General Manager September 4, 2016 September 7, 2016 CCC Thai Chief Process Engineer September 4, 2016 September 7, 2016 DDD Thai Process Engineer September 4, 2016 September 7, 2016 EEE Thai Process Engineer September 4, 2016 September 7, 2016 The services are rendered for an aggregate of four days. Based on the sworn statement issued by TTCL Philippine Branch , the scope of services offered by the branch does not include provision of expert assessment and cost estimation on the rehabilitation of industrial plants, and it did not participate in the provision of expert assessment and cost estimation on the rehabilitation of Atlas ' fertilizer plant. Moreover, in Note 11 (Significant Contract/Revenues) of the Audited Financial Statements of TTCL Philippine Branch as of December 31, 2016, the branch's existing service contract is with JG Summit only, which was already completed on December 31, 2014. cSATEH Based on another sworn statement issued by Atlas , 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 proceeding, or judicial appeal. RULING In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended ("Tax Code") , 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 on 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, you invoke the Philippines-Thailand tax treaty. Paragraph 1, Article 7 and paragraphs 1 and 2, Article 5 thereof 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; 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 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 such, the profits may be taxed in the other State but only so much of them as is attributable to the permanent establishment. 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. It includes also the furnishing of services which continues for a period or periods aggregating more than 183 days. In the case at hand, TTCL Philippine Branch constitutes a permanent establishment under paragraph 2 (b), Article 5 of the Philippines-Thailand tax treaty. However, service fees paid by Atlas to TTCL are not attributable to TTCL Philippine Branch because the latter did not participate in the provision of expert assessment and cost estimation on the rehabilitation of Atlas ' fertilizer plant subject of the Cost Estimation Contract, and TTCL Philippine Branch 's activities are confined solely to procurement and management to expand the capacity of JG Summit 's polyethylene plants in the Philippines, without engaging in the practice of engineering and other profession in the country. TaCDcE In Marubeni Corporation vs. Commissioner of Internal Revenue and the Court of Tax Appeals ( G.R. No. 76573 dated September 14, 1989) , the Supreme Court ruled that income derived by a foreign corporation directly and independently of its branch office in the Philippines cannot be attributed to the branch office, thus: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside . The transaction becomes one of the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." (Emphasis ours) Moreover, with respect to services rendered by TTCL , this activity does not constitute a permanent establishment under paragraph 2 (k), Article 5 of the Philippines-Thailand tax treaty because they were rendered for an aggregate of four days only, and not more than 183 days. This being the case, the service fees paid by Atlas to TTCL for the provision of cost estimation on Atlas ' nitrogen-phosphorous-potassium fertilizer plant are exempt from income tax pursuant to paragraph 1, Article 7 of the tax treaty. Finally, however, since the services are rendered in the Philippines, the service fees paid to TTCL are subject to value-added tax ("VAT") 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%). . ." Pursuant to Section 4.114-2 of Revenue Regulations No. 16-2005, 1 Atlas shall withhold VAT on the fees at the rate of 12% before remitting them to TTCL . Atlas shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed form and its accompanying proof of payment shall serve as documentary substantiation for Atlas ' claim of input VAT on the fees; otherwise, it may treat the passed-on VAT as part of the cost of the services and treated as asset or expense, whichever is applicable. VAT withheld shall be remitted within ten days following the end of the month the withholding was made. 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. Entitled Revenue Regulations No. 16-2005 (Consolidated Value-Added Tax Regulations of 2005) , as amended by Revenue Regulations No. 4-2007 (Amending Certain Provisions of Revenue Regulations No. 16-2005, as Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations of 2005) . n Note from the Publisher: Copied verbatim from the official document.