ITAD BIR Ruling No. 212-15

July 8, 2015 ITAD BIR RULING NO. 212-15 Articles 5 & 7, Philippines-Thailand Tax Treaty United Pulp and Paper Co., Inc. 9th Floor, Fort Legend Towers 3rd Avenue corner 31st Street Bonifacio Global City Taguig City Attention: Thalengsak Ratchburi Vice President Procurement & Finance Gentlemen : This refers to your tax treaty relief application filed on December 28, 2012, on behalf of Siam Cement Public Company Limited ("SCC") , requesting confirmation that its income from United Pulp and Paper Co., Inc. ("UPPC") is exempt from 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"). HcDSaT It is represented that SCC, with address at 1 Siam Cement Road, Bangsue, Bangkok, Thailand 10800, is a corporation organized and existing under the laws of Thailand and is a resident of Thailand per Residence Certificate: R.O. 22 issued by the Director of the Bureau of Large Business Tax Administration on January 11, 2012; that it is primarily engaged in the business of manufacturing, purchasing, selling, exchanging or handling by any means of cement, or any other material applicable or related to construction, industry and any other product for which cement forms part of the raw material; that SCC is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on January 11, 2013; that UPPC, on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located 9th Floor, Legend Towers, 3rd Avenue corner 31st Street, Bonifacio Global City, Taguig City; and that UPPC is into the business of pulp and paper manufacturing operation for cement sacks. It is also represented that sometime on April 1, 2008, UPPC and SCC entered into a Sublicensing Agreement where SCC granted the use of its SAP software license to UPPC; that to ensure that the software functions in accordance with the company's software development process, to provide maintenance support pertaining to the software and IT related infrastructures, a Maintenance Services Agreement was entered into by the same parties on October 12, 2012 to November 1, 2012 and shall renew every year unless terminated by either party upon written notice to the other party; that SCC shall furnish the installation, support or error-correction assistance and repair for the software and maintain the reliable performance of the IT related infrastructures; that UPPC will pay SCC in full the approximate monthly fee of One Hundred Thousand Baht (THB100,000.00); that per sworn Certification of Duration of Service issued by UPPC, that the services will be preliminary performed in Thailand but SCC may, if necessary, send its employees to inspect the performance of software; that as of February 15, 2013, SCC has not yet sent any of its personnel for UPPC in the Philippines, nor has it made any arrangement for such in the coming months; that in the event that the SCC will send its personnel to the Philippines, the presence of such personnel shall not exceed the period of or period aggregating 183 days for the entire duration of the Agreement; and that per Certification issued by UPPC, that as of August 13, 2013, the UPPC has not yet paid any service fee in favor of SCC for the services rendered by SCC to UPPC. ASTcaE Finally, it is represented that the transaction subject of the above 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 a judicial appeal of the taxpayers involved per Certificate issued by UPPC on December 21, 2012. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code of 1997") , as amended, applies in general, to profits derived in the Philippines by a nonresident foreign corporation. It 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 . . . profits and income, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." xxx xxx xxx" However, said income derived by a nonresident foreign corporation may be exempt from income tax or partially exempt pursuant to a treaty obligation to which the Philippine government is bound. Thus, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "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 invoke Article 7 of the Philippines-Thailand tax treaty. It provides: cDSAEI "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. xxx xxx xxx" Based on the foregoing, the profits of a Thailand enterprise shall be taxable only in Thailand unless such enterprise carries on business in the Philippines through a permanent establishment situated therein. If the Thailand enterprise carries on business as aforesaid, the profits of such enterprise may be taxed in the Philippines but only so much of them as is attributable to that permanent establishment. Applying this to the instant case, the service fees received by SCC for the 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. In relation thereto, Article 5 of the Philippines-Thailand tax 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 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; EDCcaS 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. xxx xxx xxx" Inasmuch as it is represented that the Agreement shall continue until terminated by either party, the whole of such Agreement, including its continuance, upon its automatic renewal, shall be regarded as being the "same or connected project" for the purpose of counting the aggregate period of 183 days. In other words, the 183 day period shall be counted based on the total number of days the services are rendered in the Philippines upon the effectivity of the subject Agreement, including all periods resulting from its automatic renewal. Accordingly, for as long as the employees or personnel of SCC do not stay in the Philippines for a period or periods aggregating more than 183 days in the course of their rendition of services to UPPC for the "same or connected project", then SCC shall not be deemed to have a permanent establishment in the Philippines to which payment of the service fees may be attributed to and therefore, exempt from Philippine income tax pursuant to Article 7 (1) of the Philippines-Thailand tax treaty. Moreover, the fees paid for the services rendered for UPPC within the Philippines are, however, subject to the applicable rate of value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997, as amended. DHESca Accordingly, UPPC, being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the final VAT on such fees before making any payment to SCC. In remitting the VAT withheld, UPPC shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from UPPC if it is VAT-registered taxpayer. In addition, it is required to issue in quadruplicate the relevant Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for SCC and the fourth copy for UPPC as its file copy. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002) 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