ITAD BIR Ruling No. 230-14

October 8, 2014 ITAD BIR RULING NO. 230-14 Articles 7 (Business Profits) and 5 (Permanent Establishment), Philippines-Thailand tax treaty Mariwasa Siam Ceramics, Inc. San Antonio, Sto. Tomas Batangas Attention: Ms. Emilie B. Maramag VP Finance Gentlemen : This refers to your tax treaty relief application filed on June 26, 2013, requesting confirmation that service fees to be paid by MARIWASA SIAM CERAMICS, INC. ("MARIWASA") to SIAM CEMENT PUBLIC CO. LTD. ("SIAM") 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 SIAM is a foreign corporation organized and existing under the laws of Thailand and is a resident of Thailand based on the Certificate of Residence issued by The Revenue Department of Thailand on April 24, 2013; that SIAM is situated at 1 Siam Cement Road, Bangsue, Bangkok 10800, Thailand; and that SIAM is not registered as a corporation or as partnership in the Philippines as confirmed by the Certification of Non-Registration of Company issued by the Securities and Exchange Commission ("SEC") on June 17, 2013. On the other hand, MARIWASA is situated at San Antonio, Sto. Tomas, Batangas, Philippines. It is further represented that on July 8, 2012, MARIWASA requested from SIAM to perform an internal audit based on the following scopes: STDEcA 1. To ensure that financial statements are prepared in accordance with International Accounting Standards, documentary evidences are accurate, complete, verifiable and reliable, and information is adequately disclosed in the notes to financial statements; 2. Assess the internal control systems for key business activities to establish an appropriate and adequate internal control system according to SCG Internal Control Instructions and Manual and prevent significant loss; and 3. Audit and analyze management activities and provide clear and practical recommendations in order to ensure compliance with established policy, plans, regulations, and applicable laws and regulations of each country. The following personnel of SIAM conducted the internal audit for the year 2013 of MARIWASA, detailed as follows: Name of Personnel Specific Dates of Duration of Stays in the Philippines Number of Days of Stays in the Philippines 1. Krasame Singhakul July 9-19, 2013 10 2. Chonatip Sitnarain July 7-19, 2013 12 Total Number of Days of Service rendered in the Philippines: 12 In consideration of the foregoing services, SIAM and MARIWASA agreed on audit fee for the year 2013 in the amount of 567,000 BHT (excluding the VAT). The amount of 481,950 BHT has been remitted to SIAM on September 17, 2013 by MARIWASA as shown in the printed credit transfer and information remittance. AEIHCS In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ( "Tax Code" ), as amended, provides that the royalty and service fees paid to SIAM, a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax, as follows: "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 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code provides that such fees may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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. xxx xxx xxx" For this purpose, you invoke the Philippines-Thailand tax 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. xxx xxx xxx" Under paragraph 1 above, the service fees paid to SIAM may be taxed in the Philippines if they are attributable to a permanent establishment which SIAM has in the Philippines. SaITHC 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; g) a building site or construction project where such site or project continues for a period of more than six months; CHIScD 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" Under paragraphs 1 and 2 above, SIAM is deemed to have a permanent establishment if it has a fixed place of business in the Philippines through which it wholly or partly carries on its business, such as a seat of management, a branch, an office, a store or other sales outlet, or a factory, or if it undertakes activities in the Philippines relating to a building site, a construction, assembly project, or installation project, or supervisory activities in connection therewith, which continue for a period of more than 183 days, or to the furnishing of services, including consultancy services, for a period of more than an aggregate of 183 days. Accordingly, SIAM is not engaged in trade or business in the Philippines to which a fixed place of business like an office or a branch is necessary, and since it did not provide the services in the Philippines for a period or periods aggregating more than 183 days (in fact, 9 days), SIAM is not deemed to have a permanent establishment in the Philippines. This being the case, the audit fee paid by MARIWASA to SIAM are exempt from income tax, pursuant to paragraph 1, Article 7, in relation to paragraphs 1 and 2, Article 5 of the Philippines-Thailand tax treaty. AEHCDa Furthermore, under Section 108 (A) of the Tax Code, the service fees in question, being payments for the provision of services in the Philippines by a nonresident foreign person, 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 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%) . . ." "SEC. 105. Persons Liable. Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716. The phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. HEScID The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business . " Relative thereto, MARIWASA shall withhold VAT on the audit fee at the rate of 12 percent before remitting them to SIAM. MARIWASA shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). If MARIWASA is VAT-registered taxpayer, the duly filed BIR Form No. 1600 and its accompanying proof of payment shall serve as documentary substantiation for its claim of input tax on these payment. Otherwise, MARIWASA may treat such VAT as an asset or expense, whichever is applicable. VAT withheld shall be remitted within 10 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue