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HMRC internal manual

Double Taxation Relief Manual

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HM Revenue & Customs
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DT: Philippines: double taxation agreement, Article 7: Business profits

(1) The profits of an enterprise of a Contracting State shall be taxable only in thatState unless the enterprise carries on business in the other Contracting State through apermanent establishment situated therein. If the enterprise carries on business asaforesaid, the profits of the enterprise may be taxed in the other State but only so muchof them as is directly or indirectly attributable to that permanent establishment.

(2) Subject to the provisions of paragraphs (3) and (4) of this Article, where anenterprise of a Contracting State carries on business in the other Contracting Statethrough a permanent establishment situated therein, there shall in each Contracting Statebe attributed to that permanent establishment the profits which it might be expected tomake if it were a distinct and separate enterprise engaged in the same or similaractivities under the same or similar conditions and dealing at arm’s length with theenterprise of which it is a permanent establishment.

(3) In the determination of the profits of a permanent establishment:

  1. there shall be allowed as deductions expenses of the enterprise which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses insofar as they are reasonably connected to the permanent establishment, whether incurred in the State in which the permanent establishment is situated or elsewhere;

  2. there shall not be allowed any deduction for payments by that permanent establishment to the head office or any other part of the enterprise, by way of royalties, fees or other similar payments for the use of patents or other rights or by way of commission for specific services or for management or (except in the case of a banking enterprise) by way of interest on moneys lent to the permanent establishment, unless such payments reimburse expenses actually incurred by the enterprise.

(4) In determining the profits of a permanent establishment amounts receivable by thepermanent establishment from the head office or any other part of the enterprise by way ofroyalties, fees or other similar payments in return for the use of patents or otherrights, or by way of commission for specific services performed, or for management, or(except in the case of a banking enterprise) by way of interest on moneys lent to the headoffice or any other part of the enterprise shall not be included in the receipts of thepermanent establishment except insofar as they represent reimbursement of allowableexpenses which it has actually incurred.

(5) No profits shall be attributed to a permanent establishment by reason of the merepurchase by that permanent establishment of goods or merchandise for the enterprise.

(6) For the purpose of the preceding paragraphs, the profits to be attributed to thepermanent establishment shall be determined by the same method year by year, unless thereis good and sufficient reason to the contrary.

(7) Where profits include items which are dealt with separately in other Articles of thisConvention, then the provisions of those Articles shall not be affected by the provisionsof this Article.