Isla Lipana and Co.

March 28, 2018 ITAD BIR RULING NO. 056-18 Articles 9 (Shipping and Air Transport) and 11 (Dividends) Philippines- United States of America tax treaty Isla Lipana and Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: AAA __________ Gentlemen : This refers to your tax treaty relief application dated February 16, 2009, and followed-up in your letter dated May 12, 2011, requesting confirmation that Federal Express Corporation (" FedEx ") is exempt from branch profits remittance tax pursuant to 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 "). cIECaS FACTS FedEx is a corporation organized and existing under the laws of the United States and a resident thereof based on its Certificate of Residence issued by the Internal Revenue Service of the United States. FedEx is authorized by the Civil Aeronautics Board of the Philippines to engage in scheduled foreign air transportation of cargoes from the United States to the Philippines, and vice versa. FedEx is the surviving entity in the merger between it and the Flying Tiger Line Inc. (" Flying Tiger "), also a corporation organized and existing under the laws of the United States and previously licensed to do business in the Philippines by the Securities and Exchange Commission on December 11, 1963. FedEx was the parent corporation of Flying Tiger . On August 7, 1989, FedEx filed a Certificate of Ownership and Merger with the Secretary of the State of Delaware in the United States where FedEx and Flying Tiger entered into a merger with FedEx as the surviving entity and Flying Tiger as the entity ceasing to exist. The SEC approved the merger on September 22, 1989 where it cancelled the license issued to Flying Tiger and transferred the license to FedEx . RULING In reply, please be informed that FedEx , a foreign corporation engaged in trade or business in the Philippines, is subject to branch profits remittance tax of 15% under Section 28 (A) (5) of the National Internal Revenue Code of 1997, as amended (" Tax Code "), thus: " SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporations. xxx xxx xxx (5) Tax on Branch Profits Remittances. Any profit remitted by a branch to its head office shall be subject to a tax of fifteen (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: Provided, that interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines." However, under Section 32 (B) (5) of the Code, such profits are exempt to the extent required by any treaty obligation on the Philippine government, thus: " SEC. 32. Gross Income. xxx xxx xxx (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." In this regard, paragraph 6, Article 11 and Article 9 of the Philippines-United States tax treaty and provide as follows: SAHITC " Article 11 DIVIDENDS xxx xxx xxx 6. Nothing in this Convention (except Article 9 (Shipping and Air Transport)) shall be construed as preventing the Philippines from imposing on the earnings of a corporation (other than a Philippine corporation) attributable to a permanent establishment in the Philippines, a tax in addition to the tax which would be chargeable on the earnings of a Philippine corporation, provided that any additional tax so imposed shall not exceed 20 percent of the amount of such earnings which have not been subjected to such additional tax in previous taxable years. For the purpose of this provision, the term 'earnings' means business profits attributable to a permanent establishment in the Philippines in a year and previous years after deducting therefrom all taxes, other than the additional tax referred to herein, imposed on such profits by the Philippines." " Article 9 SHIPPING AND AIR TRANSPORT 1. Notwithstanding any other provision of this Convention, profits derived by a resident of one of the Contracting States from sources within the other Contracting State from the operation of ships in international traffic may be taxed by both Contracting States; however, the tax imposed by the other Contracting State may be as much as, but shall not exceed, the lesser of a) one and one-half percent of the gross revenues derived from sources in that State; and 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. Nothing in the Convention shall affect the right of a Contracting State to tax, in accordance with domestic laws, profits derived by a resident of the other Contracting State from sources within the first-mentioned Contracting State from the operation of aircraft in international traffic. 3. The provisions of paragraphs 1 and 2 shall also apply to profits derived from participation in a pool, a joint business or in an international operating agency." Under paragraph 6 of Article 11, nothing in the tax treaty shall be construed as preventing the Philippines from imposing on the earnings of a corporation (other than a Philippine corporation) attributable to a permanent establishment in the Philippines, a tax in addition to the tax which would be chargeable on the earnings of a Philippine corporation, provided that any additional tax so imposed shall not exceed 20% of such earnings. However, this additional tax shall not apply to the earnings of a corporation from the operation of ships or aircraft in international traffic covered by Article 9 of the tax treaty. Accordingly, since FedEx is engaged in the operation of aircraft in international traffic, it cannot be imposed an additional tax on the earnings of its permanent establishment in the Philippines. This being so, branch profits remitted by FedEx 's permanent establishment in the Philippines to its head office in the United States are exempt from branch profits remittance tax pursuant to paragraph 6, Article 11 of the Philippines-United states tax treaty. 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