Embassy of Brazil and Its Personnel May be Granted Tax Exemption on Private Income and Investments Under Reciprocity Rule

March 9, 1999 BIR RULING NO. 026-99 RP-Brazil Tax Treaty; UN Convention on Privileges & Immunities 000-00-026-99 Kagawaran ng Ugnayang Panlabas Office of the Protocol 2330 Roxas Boulevard, Manila Attention: Mr . Victor G . Garcia III Assistant Secretary Gentlemen : This refers to your Note No. 32080 dated November 5, 1998 requesting for information on the following official inquiry posed by the Embassy of the Federative Republic of Brazil in its Note Verbale No. 037 dated October 5, 1998, viz: "(a) whether the Philippine Government grants income tax exemption on private financial investments and capital gains to foreigners non-residents in the Philippines, including Diplomatic and Consular Agents and Technical and Administrative Officials, nationals of the sending States; and "(b) whether the salaries of the non-residents foreign officials of Embassies, Consulates and other offices of foreign Governments, nationals of the sending States, are also exempt of income tax." prcd In reply, please be informed of the following: 1. Related provisions on the matter are duly provided for in the Convention between the Government of the Federative Republic of Brazil and the Government of the Republic of the Philippines, thus "ARTICLE 10 " Dividends "1. Dividends paid by a company which is resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. LLpr "2. However, such dividends may be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: "a) 15 per cent of the gross amount of the dividends, if the recipient is a company including a partnership; "b) 25 per cent of the gross amount of the dividends in all other cases. "xxx xxx xxx "3. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. "4. The term "dividends" as used in this Article means income from shares, "jouissance" shares or "jouissance" rights, mining shares, founder's shares or other rights not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident. "5. Where a resident of the Philippines has permanent establishment in Brazil, this permanent establishment may be subject to a tax withheld at source in accordance with Brazilian law. However, such a tax cannot exceed 15 percent of the gross amount of the profits of that permanent establishment determined after the payment of the corporate tax related to such profits. "6. Nothing in this Article shall prevent the Philippines from imposing, apart from the corporate income tax, a tax on remittance of profits by a branch to its head office provided that the tax so imposed shall not exceed 15 percent of amount remitted. "7. Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other Contracting State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject the company's undistributed profits to any tax on undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State." "ARTICLE 13 " Capital gains "1. Gains from alienation of immovable property, as defined in paragraph 2 of Article 6, may be taxed in the Contracting State in which the immovable property is situated. LLphil "2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing professional services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base may be taxed in the other State. "3. Gains derived by a resident of one of the Contracting States from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft shall be taxable only in that Contracting State. "4. Gains from the alienation of any property or right other than those mentioned in paragraph 1, 2 and 3 may be taxed in both Contracting State." "ARTICLE 22 " Other Income "Items of income of a resident of a Contracting State, arising in the other Contracting State and not dealt with in the foregoing Article of this Convention, may be taxed in that other State." The term "permanent establishment" was defined in Article 5 of the same Tax Treaty as follows, viz: "ARTICLE 5 " Permanent establishment "1. For the purpose of this Convention, the term "permanent establishment" means a fixed place of business in which the business of the enterprise is wholly or partly carried on. "2. The term "permanent establishment" shall include especially: a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; f) a mine, quarry or other place of exploration or extraction of natural resources; g) a building site or construction or assembly project, which exists for more than 6 months; h) a warehouse, in relation to person providing storage facilities for others "3. The term "permanent establishment" shall not be deemed to include: 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; c) the maintenance of stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; d) the maintenance of fixed place of business solely for the purpose of purchasing goods or merchandise, or for collecting information, for the enterprise; e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for similar activities which have a preparatory or auxiliary character, for the enterprise. As regards diplomatic and consular officials, Article 27 of the RP-Brazil Tax Treaty provides as follows, viz. : "ARTICLE 27 " Diplomatic and consular officials "Nothing in this Convention shall affect the fiscal privileges of diplomatic or consular officials under the general rules of international law or under the provision of special agreements." In this connection, pertinent portion of Article 34 of the Vienna Convention on Diplomatic Relations provides as follows, viz. : "ARTICLE 34 "A diplomatic agent shall be exempt from all dues and taxes, personal or real, national, regional or municipal, except: "a) indirect taxes of a kind which are normally incorporated in the price of goods or services; "b) dues and taxes on private immovable property situated in the territory of the receiving State unless he holds it on behalf of the sending State for the purpose of the mission; "c) estate succession or inheritance duties levied by the receiving State, subject to the provisions of paragraph 4 of Article 39; "d) dues and taxes on private income having its source in the receiving State and capital taxes on investments made in commercial undertakings in the receiving State; LexLib "e) charges levied for specific services rendered; and "f) registration, court or record fees, mortgage dues and stamp duty, with respect to immovable property, subject to the provisions of Article 23." Thus, it is clear from the foregoing enumerated exceptions that the tax exemptions of diplomatic agents/representatives do not include exemption from dues and taxes on their private income having its source in the receiving State and capital taxes on investments made in commercial undertakings in the receiving State. However, under the principle of reciprocity, the Philippine Government through the Bureau of Internal Revenue may consider granting tax exemption to the Embassy of the Federative Republic of Brazil and their personnel on such private income having source in the receiving State and capital taxes on investments made in commercial undertakings in the receiving State, provided that they can submit to the Commissioner of Internal Revenue or his duly authorized representative a copy of the special legislation or international agreement showing that their Government allows similar tax exemption to Filipino Embassy personnel receiving similar income in their territory. 2) On the matter of salaries of the non-resident foreign officials of Embassies, Consulates and other officers of the foreign Governments, who are nationals of the sending State, please be informed that same Article 34 of the Vienna Convention on Diplomatic Relations expressly exempts a diplomatic agent from all dues and taxes, personal or real, national, regional or municipal. In this light, since the salaries of the diplomatic officials and agents are not among the enumerated exceptions of exemption from taxes, the same are deemed exempt from income tax and consequently from the withholding tax of the host country, i.e., the Philippines. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue