ITAD Ruling No. 082-03

May 13, 2003 ITAD RULING NO. 082-03 Article 8, RP-Netherlands BIR Ruling No. 050-97 Herrera Teehankee Faylona & Cabrera Law Offices 5/F SGV II Building, 6758 Ayala Avenue Makati City Attention: Arsenio C. Cabrera, Jr. Raoul U. Sontillano Gentlemen : This refers to your letter dated March 14, 2002, requesting for confirmation of your opinion that the revenues derived by P & O Nedlloyd, Inc. (P & O) in the Philippines from the operation of ships in international traffic are taxable in the Philippines at the preferential rate of 1% of the gross revenues pursuant to Article 8 of the RP-Netherlands tax treaty. It is represented that P & O is a non-resident foreign corporation with business address at 3011 XB Rotterdam, Boompjes 40, The Netherlands; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated July 16, 2002; that it is engaged in international shipping and provides shipping services to clients in the Philippines covered by charter agreements; that shipping operations include that of providing local shippers with P & O's cargo containers which are transported by feeder ships belonging to other entities in or out of the Philippines from or to a drop-off point abroad; that in this drop-off point, containers coming from the Philippines are then loaded on P & O's ships and thereafter transported to their respective destinations; that, likewise, for containers bound for the Philippines, the same are loaded on the feeder ships in the drop-off point after having been transported by P & O's ships from containers' point of origin; that prior to May 2002, P & O maintained a branch in the Philippines to administer its activities; that Soriamont Steamship .Agencies, Inc. (Soriamont), an independent agent, presently handles the loading and unloading of cargo to and from the feeder ships as well as the distribution and collection of P & O's containers with the local shippers; that the Commercial Department of Soriamont prepares P & O Bill of Lading and issues invoices for prepaid charges; that before a Bill of Lading is released, the shipper must pay the charges reflected in the P & O invoice; that such payment is evidenced by an official receipt issued by P & O; that the said collection will be deposited in P & O's HSBC accounts maintained for collections and disbursement; that sometimes, the shippers/consignees prepare checks payable to Soriamont and so with the outpost collection; that these collections will be transferred to P & O thru the checks prepared by Soriamont and the corresponding P & O receipts are issued; that all contracts/documents are executed in the name of P & O and represented by officers and staff of Soriamont being the agent in the Philippines. In reply, please be informed that Article 8 of the RP-Netherlands tax treaty provides as follows: "Article 8 Shipping and Air Transport "1. Profits derived by an enterprise of one of the States from the operation of ships and aircraft in international traffic may be taxed in that State. "2. However, such profits may also be taxed in the other State, but only in so far as such profits are derived from that other State. The tax so charged shall not exceed the lesser of a) the rate of 1 per cent applied on the gross revenue derived from that other State, or b) the lowest rate of Philippine tax applied on such profits derived by an enterprise of a third State. "3. For the purposes of this Article, profits derived from the other State mean profits as determined under its domestic law realized from the carriage of passengers, excess baggage, mail, livestock or goods boarded or loaded in that other State by a shipping enterprise doing business in that State of passage documents sold therein or from uplifts anywhere in the world by an international carrier doing business in that other State of passage documents sold therein, provided that in such cases the mail, livestock or goods originate from that other State. Profits realized from the carriage of passengers, excess baggage, mail, livestock or goods which are brought to that other State solely for transshipments, or for transfer from one aircraft to another or from an aircraft to a ship or from a ship to an aircraft shall not be included. Profits from chartered flights originating from that other State shall be deemed to be derived from that State regardless of the place of sale of the passage documents. For purposes of determining the taxability of profits from chartered flights, the term "originating from that other State" shall include flights of passengers who stay in that other State for more than 48 hours prior to embarkation. "4. The provisions of paragraphs 1, 2 and 3 shall also apply to profits from the participation in a pool, a joint business or an international operating agency." Moreover, Section 9, Article 7 of the same tax treaty, also provides: "9. When profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article." In other words, the profits derived by P & O Nedlloyd in its operation of ships in international traffic is appropriately governed by the specific provisions of Article 8 on Shipping and Air Transport and not Article 7 on Business Profits of the RP-Netherlands tax treaty. EAISDH Therefore, since P & O is a non-resident shipping company incorporated under the laws of Netherlands and operating in international traffic, this Office is of the opinion and so holds that the profits earned by P & O in the Philippines from the operation of ships shall be subject to a preferential tax rate of 1 1/2% pursuant to Article 8(2)(a) of the RP-Netherlands tax treaty. (BIR Ruling No. 050-97 dated April 14, 1997) This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service