ITAD BIR Ruling No. 104-16

June 22, 2016 ITAD BIR RULING NO. 104-16 Article 8, Philippines-Denmark tax treaty Romulo Mabanta Buenaventura Sayoc & De Los Angeles 21st Floor, Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty. Priscilla B. Valer Legal Counsel Gentlemen : This refers to your application for tax treaty relief dated October 20, 2014 requesting confirmation that profits derived by Maersk Line A/S ("Maersk") from the operation of ships in international traffic in the Philippines are subject to income tax at the rate of 1 1/2 percent pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the Kingdom of Denmark for the Avoidance of Double Taxation and prevention of Fiscal Evasion with Respect to Taxes on Income (Philippines-Denmark tax treaty) . It is represented that Maersk is a foreign corporation organized and existing under the laws of Denmark and a resident thereof based on the Certificate of Residence issued by the Central Customs and Tax Administration of Denmark dated September 12, 2014; that as a company, its main business purpose is to carry on shipping, chartering, other transport business, commercial, service and industrial activities in Denmark and abroad and investments in fixed assets and financing and other related activities; and that Maersk appointed Maersk Filipinas, Inc. (MFI) as its general shipping agent in the Philippines under an Agency Agreement which became effective on February 1, 2015. In reply, please be informed that under Section 23 (F) of the National Internal Revenue Code (NIRC) of 1997, as amended, a foreign corporation like Maersk , whether or not engaged in trade or business in the Philippines, is taxable only on income derived from sources in the Philippines. It provides: SEC. 23. General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: xxx xxx xxx (F) A Foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. CAIHTE In this regard, since Maersk is engaged in the operation of ships, among others, in international traffic in the Philippines through its agent MFI, it is generally subject to income tax at the rate of 2 1/2 percent based on its Gross Philippine Billings (GPB), in accordance with Section 28 (A) (3) of the NIRC, as amended, which provides: SEC. 28. Rates of Income Tax on Foreign Corporations. Except when otherwise provided in this Code: (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 derived whether for passenger, cargo, mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents. However, said income derived by a foreign corporation may be exempt or partially exempt pursuant to a treaty obligation to which the Philippine government is bound. Thus, Section 32 (B) (5) of the Tax Code of 1997, as amended provides, viz. : "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." With respect to a treaty, Maersk invoked the Philippines-Denmark tax treaty. Article 8 of the Philippines-Denmark tax treaty provides as follows: "Article 8 Shipping and Air Transport 1. Profits derived by an enterprise which has its place of effective management in a Contracting State from the operation in international traffic of ships or aircraft may be taxed in that State. 2. Notwithstanding the provisions of paragraph 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 the lesser of: a) one and one-half per cent of the gross revenues derived from sources in that State; and b) the lowest rate that may be imposed on profits of the same kind derived under similar circumstances by a resident of a third State." Based on the foregoing, the Philippines can tax the profits derived by a resident of Denmark from the operation of ships in international traffic in the Philippines, but the rate of income tax that might be imposed on such profits will not exceed the lesser of 1 1/2 percent of the gross amount thereof, or the lowest rate of income tax imposed by the Philippines on such profits derived by a resident of a third State under similar circumstances (also known as the most favored-nation tax treatment). Accordingly, since the Philippines has not yet granted a most-favored-nation tax treatment on the taxation of profits from the operation of ships in international traffic, the rate of income tax that shall be imposed on the GPB on income from operation ships in international traffic of a resident of Denmark is 1 1/2 percent of gross revenues derived in the Philippines. Furthermore, gross receipts of international carriers derived from transport of cargo are subject to a 3% Common Carrier's Tax (Percentage Tax of International Carriers) pursuant to Sec. 118 of the NIRC, as amended by RA 10378. It provides: "SEC. 118. Percentage Tax on International Carriers. (A) International air 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 of three percent (3%) of their quarterly gross receipts. (B) International shipping carriers doing business in the Philippines shall pay a tax equivalent to three percent (3%) of their quarterly gross receipts derived from transport of cargo . (Emphasis supplied)" Moreover, since Maersk's transport of cargo is already subject to Common Carrier's tax of 3%, it is no longer subject to Value-Added Tax (VAT) of 12% pursuant to Section 109 E of the NIRC, as amended. DETACa In view of all the foregoing, this Office is of the opinion and so holds that: (1) Maersk is subject to 1 1/2 GPB tax in its operation of ships in international traffic exclusive of its other transport business pursuant to Article 8 Section 2 (a) of the Philippines-Denmark tax treaty; (2) Maersk , being an international carrier doing business in the Philippines, shall be subject to the common carrier's tax of 3 percent on the transport of cargo and exempted from 12 percent VAT also on its transport of cargo, as provided under Sections 118 (A) and 109 (E), of the NIRC, as amended by RA 10378, respectively and as implemented by Section 5 of Revenue Regulations (RR) No. 15-2013. 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue