ITAD BIR Ruling No. 187-11

July 6, 2011 ITAD BIR RULING NO. 187-11 Article 8, Philippines-Singapore tax treaty; Sections 28 (A) and 28 (3) (B) in relation to Section 32 (B) (5) of the Tax Code of 1997, as amended; BIR Ruling No. 51-98; BIR Ruling No. DA-ITAD 25-09 V.C. Mamalateo & Associates Unit 6C, 20 Lansbergh, 170 T. Morato Avenue, Quezon City Attention: Lino Ernie M. Guevara Authorized Representative Gentlemen : This refers to your tax treaty relief application filed on November 24, 2010, requesting confirmation that: (1) the Philippine sourced revenues of The China Navigation Company Pte. Ltd. ("CNCo") are subject to a final income tax at the rate of 1 1/2% under the relevant provisions of the Convention between the Republic of the Philippines and Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Singapore tax treaty") ; and, (2) the same gross revenues are subject to 3% common carriers tax under the National Internal Revenue Code ("Tax Code") of 1997, as amended. It is represented that CNCo is a nonresident foreign corporation, organized and existing under the laws of Singapore with business address at 300 Beach Road, the Concourse, Singapore 199555 based on the Certificate of Residence dated September 22, 2010, issued by the Inland Revenue Authority of Singapore; that CNCo's main line of business is the carriage of cargoes from different ports abroad into the Philippines as well as, transporting cargoes from the Philippines into different destinations abroad; that as an international liner shipping company, CNCo currently uses several ships including a ship named "Pacific Voyager" per Certificate of Registry dated December 9, 2009; that CNCo is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration issued by the Securities and Exchange Commission dated August 25, 2010; and that for tax purposes, it is registered with the Bureau of Internal Revenue per Certificate of Registration No. 9RC0000280635 dated June 22, 2010 under Taxpayer's Identification No. 294-939-924-000. It is also represented that on April 1, 2010, a principal-agent relationship was forged between CNCo and Soriamont Steamship Agencies, Inc. ("Soriamont") by virtue of a Novation Agreement dated February 5, 2010 which transferred the Agency Agreement dated June 27, 2007 between Swire Shipping Limited and Soriamont, to CNCo and Soriamont, thereby making CNCo the new principal of Soriamont; and that Soriamont is a domestic corporation duly organized and existing under the laws of the Philippines under SEC Registration No. 91170, with business address at 3rd Floor Miriam House, Legazpi St., Legazpi Village, Makati City. CacISA It is further represented that CNCo's revenues from the Philippine operations consist of ocean freight charges including bunker adjustment factor, terminal origin charge, international container security fees and documentation fees; that the revenues earned by CNCo from the Philippines form part of the tax base being reported by Soriamont, as its agent and payor of the taxes on behalf of CNCo, in paying the corresponding income tax and common carrier's tax; and finally, that the issue or transaction subject of the application for tax treaty relief is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings or judicial appeal, as confirmed by Soriamont in its certification dated October 15, 2010. In reply, please be informed as follows: A. On income tax It is provided under Section 28 (A) of the National Internal Revenue Code of 1997 ("Tax Code of 1997") , as amended, that generally, a foreign corporation engaged in trade or business in the Philippines is taxable on income derived from sources in the Philippines; thus: "SEC. 28. Rates on Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporations. (1) In General. Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent of thirty percent (30%) of the taxable income derived in the preceding taxable year from all sources within the Philippines. xxx xxx xxx" Then again, foreign corporations engaged in international carriage like CNCo shall be governed by Section 28 (A) (3) of the Tax Code of 1997, as amended with regard to their income from outbound cargoes. We quote: "SEC. 28. Rates of Income Tax on Foreign Corporations. (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, notwithstanding Section 28 (3) (B), income derived by CNCo in the Philippines from its outbound cargoes may be exempt from income tax (or partially exempt if subject to a reduced income tax rate only) if such income is so exempt (or partially exempt) pursuant to a treaty obligation binding upon the Philippine government as Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "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." aCTADI In relation thereto, Article 8 of the Philippines-Singapore tax treaty provides as follows, to wit: "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. xxx xxx xxx" Based on the foregoing, the Philippines may tax the profits derived by a resident of Singapore from the operation of ships in international traffic in the Philippines, but the rate of income tax that may 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, and 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 applies to the Gross Philippine Billings of CNCo is 1 1/2 percent. (BIR Ruling No. 51-98 dated May 5, 1998; BIR Ruling No. DA-ITAD 25-09 dated February 27, 2009) B. On Gross Receipts Tax Finally, being an international carrier, CNCo is also subject to a 3 percent percentage tax under Section 118 of the Tax Code of 1997, as amended, which provides: "SEC. 118. Percentage Tax on International Carriers. xxx xxx xxx (B) International shipping carriers doing business in the Philippines shall pay a tax equivalent to three percent (3%) of their quarterly gross receipts." It bears emphasis that the Philippines-Singapore tax treaty covers only taxes on income; hence, CNCo is liable to pay the percentage tax applicable to international carriers at the rate of 3%. 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. IDSEAH Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue