ITAD Ruling No. 094-05

September 2, 2005 ITAD RULING NO. 094-05 Article 15, Philippines-Thailand tax treaty Section 25, NIRC of 1997 QBE Insurance (Philippines), Inc. 3/F Prudential Life Building 843 A. Arnaiz Avenue, Legaspi Village Makati City Attention: Ms. Marcelina F. Valles Financial Controller Gentlemen : This refers to your application for relief from double taxation dated September 15, 2003, requesting confirmation of your opinion that your share on the salary to be paid to a certain Mr. James Jessup by QBE Insurance (Philippines), Inc . (QBE-Phils.) is exempt from Philippine income tax, pursuant to the Philippines-Thailand tax treaty. It is represented that Mr. Jessup is an individual and a resident of Thailand for tax purposes for taxable year 2003, as evidenced by Certificate of Residence dated March 23, 2004, issued by the Revenue Department of Thailand; that currently, Mr. Jessup is employed as the Regional Product Line Manager of QBE Insurance (Thailand) Co., Ltd. (QBE-Thailand); that QBE-Thailand is a corporation organized and existing under the laws of Thailand; that Mr. Jessup was hired by QBE-Phils. as Vice President of Marine Department last August 1, 2001; that he left the Philippines on April 11, 2003 and went back to QBE-Thailand to assist in the development of their marine portfolio; that subsequently QBE-Phils. retained the services of Mr. Jessup in order to maintain the client base that was established while he was working with QBE-Phils.; that QBE Thailand and QBE-Phils. entered into a Service Agreement dated November 7, 2003, whereby QBE-Thailand and QBE-Phils. agreed to share the cost of the salary of Mr. Jessup on the basis of a 50%/50% allocation, including taxes paid by QBE-Thailand with regard to his salary; that the billing for the said share would be sent through an Intercompany Branch Account to be settled quarterly within 15 days after the closing of each quarter; and that after being employed by QBE-Thailand, Mr. Jessup has had occasional visits in the Philippines as evidenced by a certificate issued by QBE-Phils., to wit: from December 5 to 10, 2003 and from December 31, 2003 to January 4, 2004. In reply, please be informed that Article 15 of the Philippines-Thailand tax treaty provides as follows, viz: "Article 15 "PERSONAL SERVICES "1. Subject to the provisions of Articles 16, 18, 19, 20, and 21, salaries, wages and other similar remuneration or income for personal (including professional) services derived by a resident of a Contracting State, shall be taxable only in that Contracting State, unless the services are performed in the other Contracting State. If the services are so performed, such remuneration or income as is derived therefrom may be taxed in that other Contracting State. "2. Notwithstanding the provisions of paragraph 1, remuneration or income derived by a resident of a Contracting State for personal (including professional) services performed in the other Contracting State shall be taxable only in the first-mentioned Contracting State if: "a) the recipient is present in the other Contracting State for a period or periods not exceeding in the aggregate 90 days in the case of professional services and 183 days in other cases, in the calendar year concerned; and "b) the remuneration or income is paid by, or on behalf of, a person who is a resident of the first-mentioned Contracting State; and "c) the remuneration or income is not borne by a permanent establishment which that person has in the other Contracting State. "3. The term 'professional services' includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants. EHaCID "4. Notwithstanding the preceding provisions of this Article, remuneration in respect of employment as a member of the regular crew or complement of a ship or aircraft operated in international traffic by an enterprise of a Contracting State shall be taxable only in that State." Based on the foregoing, remuneration or income from services performed in the Philippines may be taxed in the Philippines. However, even when the services are so performed in the Philippines, the remuneration or income to be derived by a resident of Thailand shall be taxed only in Thailand if all the conditions set forth in paragraph 2 of Article 15 have been complied with. Applying the facts as represented, this Office is of the opinion and hereby holds that not all conditions laid down in paragraph 2 Article 15 are met with respect to the share of your company on the 50/50 allocation. The condition set forth in paragraph 2(b) of Article 15 is lacking, since the share of the remuneration or income to be paid to Mr. Jessup is not paid by, or on behalf of a person who is a resident of Thailand, but is actually paid by QBE-Phils., a resident of the Philippines. HIAEcT Consequently, the share of the salary of Mr. Jessup to be paid by QBE-Phils. shall be subject to income tax in the Philippines under Section 25(A)(1) or Section 25(B) of the National Internal Revenue Code of 1997, viz: "SEC. 25. Tax on Nonresident Alien Individual . "(A) Nonresident Alien Engaged in Trade or Business Within the Philippines. "(1) In General. A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a ' nonresident alien doing business in the Philippines ', Section 22(G) of this Code notwithstanding. "xxx xxx xxx "(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines . There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income. . . . "xxx xxx xxx Such being the case, QBE-Phils. shall be required to withhold the proper amount of income tax upon accrual or payment of its 50% share of the salary of Mr. Jessup in accordance with Revenue Regulations No. 2-98, as amended, taking into consideration whether or not Mr. Jessup is a nonresident alien engaged in trade or business in the Philippines. [Refer to Sections 2.78 and 2.79 or 2.57-1(C), Revenue Regulations No. 2-98, as amended] HETDAC Please be guided accordingly. Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC-Commissioner of Internal Revenue