A revised double taxation agreement (Revised DTA) between Thailand and the Philippines will replace the existing 1983 treaty and will become effective on 1 January 2019. The major portions of the 1983 tax treaty were revised in order to make the treaty more relevant to the current tax laws and environment and in order to be in line with the OECD Model Tax Convention.
The key highlights of the Revised DTA is the expansion of Permanent Establishment (PE) definition (Article 5). The Revised DTA expands the existence of a fixed place of business’s PE by including (i) any other place of extraction or exploration of natural resources; (ii) a farm or plantation and (iii) a building site, a construction, installation or assembly projects or supervisory activities in connection with such projects where such site, project or activities continue for a period of more than three months (previously six months for building site and construction projects).
The services PE provision was also amended in order to cover the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, only if it lasts for a period or periods aggregating more than six months within any 12-month period (previously more than 183 days).
In addition, Article 9 (Insurance) was deleted and moved to Article 5; now establishing that an insurance enterprise will be deemed to have a PE in the other contracting State if it collects premiums in the territory of that State or insures risks situated therein through an employee or through a representative who is not an agent of an independent status. The key provisions of the Revised DTA on the withholding tax include the introduction of a general 15% withholding tax applied on dividends and adds a new 10% preferential tax rate on dividends if the beneficial owner is a company (other than a partnership) which directly holds at least 25% of the capital of the company paying the dividends. It is important to note the introduction of a ‘beneficial ownership’ requirement with respect to dividends in the Revised DTA, as it highlights the shift to a commercial substance-focused approach in a local tax authority’s application of the DTA relief. Under the Revised DTA, 10% preferential tax rate on interest paid to any financial institution (including an insurance company) is maintained and a general 15% withholding tax applies in respect to any other interest payments if the recipient is the beneficial owner. The Revised DTA provides a 15% withholding tax on royalties if the recipient is also the beneficial owner.
Thai investors intending to invest or currently holding investments in the Philippines may now need to carefully evaluate the potential impact of the Revised DTA on tax implications of investing in the Philippines. The same can be said for current or future Filipino investors looking to enter into the Thai market.