Ocean Mart Shipping Agency, Inc.

March 27, 2018 ITAD BIR RULING NO. 052-18 Article 8 (Shipping and Air Transport), Philippines-Singapore tax treaty Ocean Mart Shipping Agency, Inc. Room 312, Velco Centre Corner RS Oca and Delgado Streets Port Area, Manila Attention: AAA __________ Gentlemen : This refers to your letter dated May 31, 2006 applying for tax treaty relief on freight charges collected and remitted by Ocean Mart Shipping Agencies, Inc. (" Ocean Mart ") to E.P. Carriers Pte. Ltd. (" E.P. Carriers ") under the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Singapore tax treaty") . It is represented that E.P. Carriers is a corporation organized and existing under the laws of Singapore and is a resident thereof based on its Certificate of Residence issued by the Inland Authority of Singapore: that it is not registered as a corporation or partnership in the Philippines as confirmed by the Certification of Non-Registration issued by the Securities and Exchange Commission; and that on the other hand, Ocean Mart is a domestic corporation organized and existing under Philippine laws. TIEHSA It is further represented that E.P. Carriers and Ocean Mart entered into an Agency Agreement ("Agreement") where E.P. Carriers appoints Ocean Mart as its agent in the Philippines in respect of the operation of Liner Service, the Vessels, and the Containers in the Philippines; that Liner Service means the liner services operated or managed by E.P. Carriers or the Principals in the Philippines; that Principals means the owners, operators or managers of the Vessels; that Vessels means the vessels used by E.P. Carriers or the Principals in the Philippines; Container means any container and equipment owned, operated, leased or managed by E.P. Carriers or the Principals; that Ocean Mart shall undertake all necessary and customary agency services for E.P. Carriers and the Principals and use its best endeavors to protect fully the rights and interests of E.P. Carriers and the Principals; that Ocean Mart shall perform services, on behalf of E.P. Carriers ; 1 that Ocean Mart shall collect and pay all Freight charges; that Freight means all freight and other payments including, if applicable, but not limited to, terminal handling charges, emergency bunker surcharge, currency adjustment factor, canal surcharges, demurrages, detention, delivery, handling and other related charges; that, in consideration, E.P. Carriers shall pay a remuneration to Ocean Mart in accordance with the instructions of the Principals. 2 In reply, please be informed that under Section 28 (A) (3) (b) of the National Internal Revenue Code of 1997, as amended (" Tax Code "), the Freight payable to E.P. Carriers , a foreign corporation engaged in trade or business in the Philippines through an agent, 3 is subject to income tax at the rate of 2 1/2 percent, thus: " (A) Tax on Resident Foreign Corporations. xxx xxx xxx (3) International Carrier. An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on its 'Gross Philippine Billings' as defined hereunder: xxx xxx xxx (b) International Shipping. 'Gross Philippine Billings' means gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents." However, under Section 32 (B) (5) of the Tax Code, said income is exempt or partially exempt pursuant to a treaty obligation binding upon the Philippine government, viz. : " (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title. xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the government of the Philippines." With respect to the treaty, Article 8 (Shipping and Air Transport) of the Philippines-Singapore tax treaty provides: " Article 8 SHIPPING AND AIR TRANSPORT 1. Profits from sources within a Contracting State derived by an enterprise of the other Contracting State from the operation of ships or aircraft in international traffic may be taxed in the first-mentioned State but the tax so charged shall not exceed whichever is the lesser of either: a) one and one-half per cent of the gross revenues derived from sources in that State; or b) the lowest rate of Philippine tax that may be imposed on profits of the same kind derived under similar circumstances by a resident of a third State. 2. The provisions of paragraph 1 shall also apply to profits derived from the participation in a pool, a joint business or in an international operating agency." TDAcCa Under paragraph 2 of Article 8, profits from sources within the Philippines derived by an enterprise of Singapore from the operation of ships or aircraft in international traffic may be taxed in the Philippines at a rate not to exceed (a) 1 1/2 percent of the gross revenues derived from sources in the Philippines, or (b) the lowest rate of income tax that may be imposed by the Philippines on such profits derived under similar circumstances by a resident of a third State ("most-favored-nation treatment") . Accordingly, since the Philippines has not yet granted such most-favored-nation treatment , the Freight collected and remitted by Ocean Mart to E.P. Carriers under the Agreement , which corresponds to the latter's Gross Philippine Billings, is subject to income tax at the rate of 1 1/2 percent. Moreover under Section 118 (B) of the Tax Code, E.P. Carriers is subject to business tax at the rate of three percent (3%) of its quarterly gross receipts issued by its agent, Ocean Mart , thus: "(B) International shipping carriers doing business in the Philippines on their gross receipts derived from transport of cargo from the Philippines to another country shall pay a tax equivalent to three percent (3%) of their quarterly gross receipts." This ruling is issued on the basis of the facts as represented. However, if upon investigation, it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. As provided under Paragraph 3 (Agent's Obligations) of the Agency Agreement between E.P. Carriers Pte. Ltd. and Ocean Mart Shipping Agencies, Inc. 2. As provided under Paragraph 5 (Freight) of the Agency Agreement between E.P. Carriers Pte. Ltd. and Ocean Mart Shipping Agencies, Inc. 3. Pursuant to Section 3 (d) of Republic Act No. 7042 (An Act to Promote Foreign Investments, Prescribed the Procedures for Registering Enterprises Doing Business in the Philippines and for Other Purposes) , otherwise known as the Foreign Investments Act of 1991 , which provides: "d) The phrase "doing business" shall include soliciting orders, service contracts, opening offices, whether called "liaison" offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization: Provided, however, That the phrase "doing business" shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account."