Revised DTA between Thailand and the Philippines
Thailand and the Philippines signed a revised Double Taxation Agreement (“the revised DTA”) to replace the current version, which has been in effect since 1983. The revised DTA will come into force from 1 January 2019 onwards.
Keywords: Mazars, Thailand, Philippines, Tax, DTA, Double Taxation Agreement, Permanent Establishment, Revenue Code
1 October 2018
The revised DTA contains various changes, including a change in the definition of a permanent establishment (“PE”). The major changes to the definition of a PE are set out below:
Current DTA | Revised DTA | Difference |
Article 5 – Permanent Establishment 2. The term “permanent establishment” includes especially: (g) a building site or construction project where such site or project continues for a period of more than 6 months. (h) an assembly or installation project which exists for more than 3 months. (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. | (j) a building site, a construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities continue for a period of more than 3 months. (k) the furnishing of services including consultancy services by a resident of one of the Contracting States through employees or other personnel, where 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 6 months within any twelve-month period. | The period for a building site or construction project is changed to 3 months, similar to that for an assembly or installation project. In addition, supervisory activities in connection with a building site, a construction, installation or assembly project are added in the revised DTA. The period is changed from 183 days to 6 months within any twelve-month period.
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3. Notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include: (a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;
| (a) the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display; (f) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. | Delivery activity is removed from the item on exclusion from being a PE in paragraph 3 (a) and (b). Paragraph 3 (f) is added in the revised DTA. |
4. A person acting in a Contracting State on behalf of an enterprise of the other Contracting State (other than an agent of any independent status to whom paragraph 5 applies) shall be deemed to be a permanent establishment in the first-mentioned State, if: 1. he has, and habitually exercises in that State, an authority to conclude contracts on behalf of the enterprise; unless his activities are limited to the purchase of goods or merchandise for that enterprise;
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(a) has and habitually exercises in the first-mentioned State, an authority to conclude contracts on behalf of the enterprise; unless his activities are limited to those mentioned in paragraph 3 of this Article; |
Activities which will not result in a dependent agent being considered a PE under Clause 4(a) have changed from “the purchase of goods or merchandise for that enterprise” to “those mentioned in paragraph 3 of this Article”).
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In addition, Article 9 of the current DTA has been moved to the definition of a PE in Article 5. Therefore, under Article 5 of the revised DTA, “an insurance enterprise of a Contracting State shall, except in regard to reinsurance, be deemed to have a permanent establishment in the other Contracting State if it collects premiums in the territory of that other State or insures risks situated therein through an employee or through a representative who is not an agent of an independent status within the meaning of paragraph 6.”
Furthermore, the revised DTA amends the withholding tax rates of dividends, interest, and royalties, as set out below:
Current DTA | Revised DTA |
Article 11 - Dividends 2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if recipient of the dividends is a company which holds directly at least 15% of voting shares of the company paying the dividends, the tax so charged shall not exceed: (a) 15% of the gross amount of the dividends if the company paying the dividends is a Philippine company or if the company paying the dividends is a Thai company engaged in an industrial undertaking: (b) 20% of the gross amount of the dividends if the company paying the dividends is a Thai company not engaged in an industrial undertaking. |
2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Construction State, the tax so charged shall not exceed: (a) 10% of the gross amount of the dividends if the beneficial owner is a company (excluding partnerships) which holds directly at least 25% of the capital of the paying company; (b) 15% of the gross amount of the dividends in all other cases.
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Article 12 – Interest 2. However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the beneficial owner of the interhest the tax so charged shall not exceed: (a) 10% of the gross amount if interest if (i) It arises in Thailand and is received by Philippine financial institutions (including insurance companies (ii) It arises in the Philippines in respect of public issues of bonds, debentures or similar obligations (b) 15% of the gross amount of interest if it arises in the Philippines; and (c) 25% of the gross amount of interest if it arises in Thailand |
2. However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed: (a) 10% of the gross amount of the interest if it is received by any financial institution (including an insurance company);
(b) 15% of the gross amount of the interest in all other cases.
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Article 13 - Royalties 2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, the tax so charged shall not: (a) 15% of the gross amount of the royalties if the royalties are paid: (i) By an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities; or (ii) By an enterprise under the promotion of the Board of Investments of Thailand; or (iii) In respect of cinematographic films or tapes for television or broadcasting; (b) 25% of the gross amount of the royalties in all other cases. |
2. However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the beneficial owner of the royalties is a resident of the other Contracting State, the tax so charged shall not exceed 15% of the gross amount of the royalties.
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However, the amendment of the withholding tax rates under the revised DTA as listed above does not have any practical impact on the payment of royalties and interest by a Thai entity to a Philippines entity. This is because the new withholding tax rates are still not lower than the rate set out in the Thai Revenue Code, which is 15%. Therefore, the rates under the Revenue Code (15%) shall apply to the payment of royalties or interest that a Thai entity makes to a Philippines entity. In addition, the withholding tax rate for dividends that a Thai entity pays to a Philippines shareholder in general is still 10%, which is also the rate under the Revenue Code, as the new withholding tax rate under the revised DTA is still not lower than the rate set out in the Thai Revenue Code.
Article 15, “Personal Services”, of the current DTA has also been amended. In the revised DTA, personal services are divided into “Independent Personal Services” (Article 14) and “Dependent Personal Services” (Article 15). Conditions for both types of personal services are set out to determine whether income derived by a resident of a Contracting State from such services provided in the other Contracting State is taxable in that other Contracting State or not.
The revised DTA contains other changes in addition to those discussed above. Therefore, Thai entities expecting to make transactions with Philippines entities should carefully consider the impact of such changes.
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