ITAD BIR Ruling No. 162-15

June 2, 2015 ITAD BIR RULING NO. 162-15 Article 10 (7), Philippines-Netherlands tax treaty SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Fabian K. Delos Santos Partner, Tax Services Gentlemen : This refers to your tax treaty application ("TTRA") filed on June 10, 2013, requesting confirmation that the remittance of branch profits by SGP Kalayaan B.V. Philippine Branch ("SGP-Philippine Branch") to SGP Kalayaan B.V. Head Office ("SGPK") (formerly EME Kalayaan B.V.) 1 is subject to income tax at the rate of 10% pursuant to Article 10 (7) of the Convention between the Government of the Republic of the Philippines and the Government of the Kingdom of the Netherlands with respect to Taxes on Income ("Philippines-Netherlands tax treaty " ) . SGPK is a foreign corporation duly organized and existing under the laws of the Netherlands. It is a resident thereof within the meaning of Article 4 of the Convention for the avoidance of double taxation between the Philippines and the Netherlands with principal address at Herikerbergweg 238, 1101 CM Amsterdam, Netherlands. It is authorized by the Securities and Exchange Commission to establish a branch office ("SGPK-Philippine Branch") in the Philippines with business address at 25th Floor Philamlife Tower, 8767 Paseo de Roxas, Makati City and is allowed to form and invest in a Philippine limited partnership under SEC License No. A200000885 issued on March 2, 2000. It is represented that the amount of Two Hundred Fifty Thousand US Dollars (USD250,000) have been earmarked for remittance as branch profits to SGPK on June 28, 2013 per certification issued by the appointed resident agent of SGPK-Philippine Branch . Accordingly, on July 1, 2013 SGPK-Philippine Branch with account no. 2096-02571-2 remitted the amount of USD225,000.00 to SGPK on July 1, 2013, the authorized receiver of the branch profits, per certification issued by Metrobank on July 12, 2013. It is further represented, per sworn certification dated November 28, 2012, that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that under Section 28 (A) (5) of the National Internal Revenue Code of 1997 ( "Tax Code" ), as amended, any profit remitted by a branch to its head office shall be subject to 15% tax, to wit: "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (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. xxx xxx xxx" However, under Section 32 (B) (5) of the Tax Code, these remitted branch profits may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation in the Philippines, thus: "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 Paragraph 7 of Article 10 of the Philippines-Netherlands tax treaty which provides: " Article 10 Dividends xxx xxx xxx 7. If a resident of one of the States has a permanent establishment in the other State, this permanent establishment may be subject to an additional tax on the profits remitted by that permanent establishment to its head office in accordance with the law of the last-mentioned State, but the additional tax so charged shall not exceed 10 per cent of the amount of the remitted profits. This provision shall not apply to profits mentioned in Article 8." (underscoring supplied) Based on the foregoing, the profits remitted by a permanent establishment located in the Philippines to the head office in the Netherlands is subject to an additional tax not exceeding in compliance with the law of the Philippines but such tax shall not exceed ten percent (10%) of the amount of the remitted profits. In relation thereto, paragraphs 1 and 2 of Article 5 of the same treaty, define a permanent establishment as follows: " Article 5 Permanent Establishment 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business in 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, quarry or other place of exploration or extraction of natural resources; g) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than 183 days; h) the furnishing of services including consultancy services by an enterprise through an employee or other personnel where activities of that nature continue (for the same or a connected project) for a period or periods exceeding in the aggregate 183 days within any twelve-month period. . . ." (Emphasis provided) In view of the foregoing, it cannot be gainsaid that the branch profits remitted by SGPK-Philippine branch to its head office SGPK is subject to income tax at the rate of ten percent (10%) of the amount of remitted profits pursuant to Article 10 (7) of the Philippines-Netherlands tax treaty. 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Based on a copy of Amended SEC License No. A200000885 issued by the Securities and Exchange Commission dated March 15, 2006.