Sumisetsu Philippines, Inc.

October 23, 2018 ITAD BIR RULING NO. 110-18 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines- Thailand Tax Treaty Sumisetsu Philippines, Inc. 8th Floor G.C. Corporate Plaza 150 Legaspi Street, Legaspi Village 1229 Makati City Attention: AAA _______________ Gentlemen : This refers to your tax treaty relief application filed on October 23, 2012 requesting confirmation that payments made to Thai Semcon Company, Limited ("Thai Semcon") by Sumisetsu Philippines, Inc. ("Sumisetsu") 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") . It is represented that Thai Semcon is a corporation organized and existing under the laws of Thailand and a resident thereof for tax purposes based on its amended Articles of Association and the Certificate of Residence issued by the Revenue Department of Thailand; that Thai Semcon is engaged in electrical design and installation, communication design and installation, mechanical design and installation, and plant and machinery installation; that it is not registered as a corporation or partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission; that, on the other hand, Sumisetsu is a corporation organized and existing under the laws of the Philippines; and that Sumisetsu is engaged in electrical installation (building electrical facilities, factory electrical facilities, aerial cable lines, communication lines and facilities and security systems) and mechanical installation (airconditioning system, ventilation system, plumbing and sanitary systems, special piping systems and clean rooms). HTcADC It is also represented that on August 8, 2012, Thai Semcon and Sumisetsu entered into a Memorandum for Dispatched Engineer wherein Thai Semcon will provide technical support to Sumisetsu through Thai Semcon 's employee, BBB; that in consideration, Sumisetsu will pay Thai Semcon an engineering instruction fee in the amount of _______ Thai baht per day; and that the employee's visa, work permit and other necessary certification for staying and working in the Philippines, hotel, air ticket, a fully maintained car with driver, all operating costs during service and medical treatment and hospitalization shall be the responsibility of Sumisetsu , while the employee's personal accident insurance shall be borne by Thai Semcon . It is further represented based on a certification issued by Sumisetsu and the passport of BBB, that his duration of service was effective from August 9 to October 31, 2012; and that he stayed in the Philippines for 74 days during such period from August 9-29 and September 6 to October 28, 2012. It is finally represented per another certification issued by Sumisetsu that 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. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended ("Tax Code") , payments made to Thai Semcon are subject to income tax at the rate of 30%, thus: " 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 payments to Thai Semcon are exempt to the extent required by any treaty obligation with the Philippine government, viz. : " 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." With respect to the treaty, paragraph 1, Article 7 of the Philippines-Thailand tax treaty provides: " 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." 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 that permanent establishment. For purposes of determining the existence of a permanent establishment, paragraphs 1 and 2, Article 5 of the tax treaty provide: aScITE " 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." As defined, 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 furnishing of services, an enterprise is deemed to have a permanent establishment if it undertakes this activity in a Contracting State for more than an aggregate period of 183 days. Accordingly, since Thai Semcon 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 furnish services in the Philippines for more than an aggregate of 183 days, but for 74 days only, Thai Semcon is not deemed to have a permanent establishment under paragraphs 1 and 2 of Article 5 of the Philippines-Thailand tax treaty. This being the case, payments made by Sumisetsu to Thai Semcon for the technical support provided are exempt from income tax, pursuant to paragraph 1 of Article 7 of the tax treaty. Finally, under Section 108 (A) of the Tax Code , the payments for services rendered in the Philippines are subject to Value-Added Tax ("VAT") thus: " 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 the 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%), after any of the following conditions has been satisfied: xxx xxx xxx" With respect to the payment of VAT, Sumisetsu , being the resident withholding agent and payor in control of the payment, shall be responsible for the withholding of the 12% final VAT on the said payments to Thai Semcon . In remitting the VAT withheld, Sumisetsu shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form and its accompanying proof of payment thereof shall serve as documentary substantiation for Sumisetsu 's claim of input VAT upon filing its own VAT return. In case Sumisetsu is a non-VAT registered taxpayer, the passed-on VAT shall form part of the cost of purchased services from Thai Semcon , which may be treated as "expense" or "asset," whichever is applicable. 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. HEITAD Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue