AT Lagmay Law Office

March 11, 2020 ITAD BIR RULING NO. 036-20 Article 2 (1) (a) (ii) Philippines-United States tax treaty AT Lagmay Law Office Unit 203 Cityland 3, V.A. Rufino cor. Esteban Sts. Legaspi Village, Makati City 1229 Attention: AAA Gentlemen : This refers to your tax treaty relief application filed on 19 April 2012 on behalf of SAIPAN MARINE CORPORATION ("SMC") , requesting confirmation that its income derived from the Consultancy Agreement it executed with MALAYAN TOWAGE AND SALVAGE CORPORATION ("MTSC") is exempt from Philippine income tax under the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income ("Philippines-United States tax treaty") . Documents submitted show that SMC is a nonresident foreign corporation duly organized and existing under and by virtue of the laws of Saipan, Northern Marianas Island, and is a resident thereof for tax purposes per the Letter of Compliance issued by the Revenue and Taxation Division of the Department of Finance of the Commonwealth of the Northern Marianas Island ("CNMI") ; that for tax purposes, CNMI Revenue and Taxation has authority over SMC and not the United States' Internal Revenue Service ("IRS") per U.S. IRS Publication 570, hence the Letter of Compliance. On the other hand, MTSC is a corporation duly organized and existing under Philippine laws which is primarily engaged in the business of providing international maritime solutions. In reply, please be informed that relief from the Philippines-US tax treaty applies only to profits derived in the Philippines by resident corporations/individuals of the United States. Article 2 (1) (a) (ii) of the Philippines-United States tax treaty defines "United States" ("U.S.") , as follows: "Article 2 GENERAL DEFINITIONS 1. In this Convention, unless the context otherwise requires: a) (i) The term "United States" means the United States of America; and (ii) When used in a geographical sense, the term "United States" means the states thereof and the District of Columbia. x x x" Based on the above provision, the term U.S. means the states thereof and the District of Columbia. The non-inclusion of U.S. territories/possessions leads to a conclusion that the Philippines-United States tax treaty does not apply to residents of the U.S. territories/possessions like, in the instant case, The Northern Marianas Island. AScHCD Moreover, per the 16 April 2013 letter of the U.S. IRS Competent Authority to the BIR, the IRS confirms that it provides Form 6166 (Certification of U.S. Tax Residency) to certify that the person claiming tax treaty benefits is a resident of the U.S. for federal tax purposes, and that a U.S. resident may use the said form to claim tax treaty benefits. Furthermore, in an overview and analysis on "Federal Tax Law and Issues Related to the United States Territories" published by the U.S. Congress' Joint Committee on Taxation (JCT-41-12) 14 May 2012, it was stated that "U.S. bilateral income tax treaties define the United States as not including the U.S. territories and generally do not treat territory residents as residents of the United States. Consequently, in the absence of rules to the contrary, treaty reductions of source-basis taxation do not apply to individuals resident in, or corporations organized on, the territories." In view thereof, in the absence of a clear and convincing evidence to support the grant of benefits under the Philippines-US tax treaty, specifically, a confirmation from the U.S. IRS of the residency of SMC for tax purposes, the subject tax treaty relief application is hereby denied for lack of legal basis. Accordingly, income derived by SMC from MTSC under the Consultancy Agreement entered into by and between them is subject to Philippine income tax under Section 28 (B) (1) of the 1997 National Internal Revenue Code, as amended. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue