Executive summary

On 18 April 2018, the Philippines–Mexico Income Tax Treaty (the Treaty) entered into force and will become effective on 1 January 2019.

Significant provisions in the Treaty include:

• Computation of the time limits in determining the existence of a permanent establishment (PE) in relation to the activities carried on by an associated enterprise within a Contracting State
• Expanded coverage of taxable business profits under Article 7
• Withholding tax rates for dividends, interest and royalties
• Exemption from capital gains on the transfer of property between members of the same group of companies
• Additional taxable capital gains on the alienation of shares
• Provisions against treaty abuse

This Alert summarizes the key provisions of the Treaty.

Detailed discussion

Computation of the time limits for PE purposes on activities carried out by an associated enterprise (Article 5)

In computing the time limits under Article 5 to determine the existence of a PE, i.e., 6 months (building site) or 183 days in any 12-month period (services), the activities carried on by an enterprise associated with another enterprise will be aggregated with the period during which the activities are carried on by the associated enterprise, where both enterprises have identical or substantially similar activities.

Expanded coverage of taxable business profits (Article 7)

Business profits are taxable in the other Contracting State to the extent that they are attributable to one of the following:

1. The PE situated in the other State
2. Sales in the other State of goods or merchandise of the same or similar kind as the goods or merchandise sold through the PE
3. Other business activities carried on in the other State of the same or similar kind as those effected through the PE

However, business profits under (b) and (c) are not taxable if the enterprise demonstrates that such sales or business activities are carried out for reasons other than obtaining a treaty benefit.

Dividends (Article 10)

Dividends are taxed at the following rates depending on the percentage of ownership of the beneficial owner in the capital of the company paying the dividends:

• 5% of the gross amount if the beneficial owner is a company (other than a partnership) which directly holds at least 70% of the capital
• 10% if the beneficial owner is a company (other than a partnership) which directly holds at least 10% of the capital
• 15% in all other cases

Interest (Article 11)

Interest is taxed at 12.5% of the gross amount if the beneficial owner thereof is a resident of the other Contracting State, subject to certain exceptions.

Royalties (Article 12)

Royalties are taxed at 15% of the gross amount if the beneficial owner thereof is a resident of the other Contracting State.

Capital gains (Article 13)

Capital gains tax will not apply in transfers of property between members of the same group of companies to the extent that the consideration received by the transferor consists of participation or other rights in the capital of the transferee or of another company resident of the same Contracting State that owns directly or indirectly 80% or more of the voting rights and value of the transferee, subject to specific conditions.

Gains from the alienation of shares, participation, or other rights in the capital of a company or other legal person are taxable, if at any time during the 12-month period preceding such alienation, the recipient of the gain together with all related persons had a participation of at least 20% in the capital of that company or other legal person.

Safeguard against treaty abuse (Article 22)

A treaty benefit will not be granted if it is reasonable to conclude, considering all relevant facts and circumstances, that obtaining a benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that the benefit is in accordance with the relevant provisions of the Treaty.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young Philippines (SGV & Co.), Makati City

• Luis Jose P. Ferrer
  luis.jose.p.ferrer@ph.ey.com
• Fidela T. Isip-Reyes
  fidela.t.isip-reyes@ph.ey.com

Ernst & Young LLP, Philippine Tax Desk, New York

• Betheena Dizon
  betheena.c.dizon1@ey.com

Ernst & Young LLP, Asia Pacific Business Group, New York

• Chris Finnerty
  chris.finnerty1@ey.com
• Kaz Parsch
  kazuyo.parsch@ey.com
• Bee-Khun Yap
  bee-khun.yap@ey.com

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ATTACHMENT

PDF version of this Tax Alert