Executive summary

The Philippines-Sri Lanka Income Tax Treaty (the Treaty) has entered into force¹ and will become effective on 1 January 2019 for the Philippines and 1 April 2019 for Sri Lanka.

Significant provisions include:

• Coverage and threshold periods to determine the existence of a permanent establishment (PE)
• Expanded coverage of taxable business profits under Article 7
• Withholding tax rates for dividends, interest and royalties
• Tax exemption requirement for capital gains

This Alert summarizes the key provisions of the Treaty.

Detailed discussion

Coverage and threshold periods to determine the existence of a PE (Article 5)

The Treaty includes the following activities, among others, in determining the existence of a PE:

a. Exploration of natural resources including a drilling rig or ship

b. A warehouse, in relation to a person providing storage facilities for others

c. A building site or construction or installation project if it lasts more than 183 days

d. The furnishing of services, including consultancy services by an enterprise through employees or other personnel engaged by the enterprise for such purpose but only where activities of that nature continue within the country for a period or periods aggregating more than 90 days within any 12-month period for the same or connected project

An enterprise will also be deemed to have a PE in the other Contracting State and to carry on business through that PE if substantial equipment is being used in that State for more than six months by, for, or under a contract with the enterprise.

When the activities of an agent are devoted wholly or almost wholly on behalf of an enterprise, he will not be considered to be an agent of independent status for PE purposes, if it is shown that the transaction between the agent and the enterprise were not made under arms-length conditions.

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:

a. The PE situated in the other State

b. Sales in the other State of goods or merchandise of the same or similar kind as those sold through that PE

c. Other business activities carried on in the other State of the same or similar kind as those effected through the PE

Dividends (Article 10)

Dividends are taxed at the following rates if the recipient is the beneficial owner:

• 15% of the gross amount if the beneficial owner is a company (excluding partnership)
• 25% in all other cases

Branch profits remitted to its head office are taxed at 15% of the gross remittance.

Interest (Article 11)

Interest may generally be taxed at 15% of the gross amount if the recipient is the beneficial owner.

Royalties (Article 12)

Royalties will be taxed at the following rates where the recipient is the beneficial owner:

• 15% of the gross amount if the royalties are paid by an enterprise registered with, and engaged in preferred areas of activities
• 25% in all other cases

Capital gains (Article 13)

Generally, gains from the alienation of stocks and shares of a company may be taxed in the Contracting State in which they have been issued.

Gains from the alienation of interest in a partnership or a trust, the property of which consists principally of immovable property situated in a Contracting State, may also be taxed in that State.

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ENDNOTE

¹ 14 March 2018.

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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

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