ITAD Ruling No. 135-02

August 2, 2002 ITAD RULING NO. 135-02 Tax Code of 1997-NIRC, Sec. 28 & 118 BIR Ruling No. ITAD-521-88 JBA Shipping Services, Inc. 5th Floor, Vernida IV Bldg. 128 Alfaro St., Salcedo Village Makati City Attention: Alfonso E. Avecilla Vice-President Gentlemen : This refers to your letters dated July 9, 2001 and September 21, 2001 requesting clarification on the proper tax rate applicable on the come derived in the Philippines from the freight and carriage operations by your principal, Vietnam Ocean Shipping Company (VOSCO). It is represented that VOSCO is a Vietnam-registered marine vessel; that it is currently paying a total of 5.5% income and common carriers tax on its Gross Philippine Billings in the Philippines on its taxable operations therein despite the existing RP-Vietnam Maritime Merchant Shipping Agreement and Vietnam's inclusion in the ASEAN; that VOSCO alleged to your company, JBA Shipping Services (JBA), of the existence of the Double Taxation Agreement (DTA) between the Philippines and Vietnam which has apparently been enjoyed by Philippine vessels in Vietnam but which privilege has not been extended to VOSCO in the Philippines. In reply, please be informed that Article 29 of the proposed DTA between the Philippine and Vietnam provides as follows: "Article 29 Entry into Force 1. Each of the Contracting States shall notify to the other in writing through the diplomatic channel the completion of the procedures required by its legislation for the entry into force of this Agreement. This Agreement shall enter into force on the date of the later of these notifications . (emphasis supplied) 2. The Agreement shall have effect in respect of taxes covered by this Agreement, including taxes withheld at source on income paid to non-resident, for any taxable period beginning on or after the first day of January next following that year in which the Agreement enters into force." "xxx xxx xxx" In this connection, Article VII, Section 21 of the Philippine Constitution provides, viz : "Sec. 21. No treaty or international agreement shall be valid and effective unless concurred in by at least two-thirds of all the Members of the Senate. "xxx xxx xxx" Based on the foregoing, while the proposed RP-Vietnam tax treaty has been signed on November 14, 2001 by the authorized representatives/negotiators of both Contracting States, the same shall become effective only upon compliance by the treaty partners of their respective constitutional and legislative processes and the necessary notification requirement for its entry into force. In the Philippines, the Constitution provides that no treaty or international agreement shall be valid and effective until the same is ratified by the Senate. Hence, since the RP-Vietnam tax treaty is not yet ratified by the concurrence of at least two-thirds of all members of the Philippine Senate, the same is not yet effective. Therefore, any benefit that may be derived therefrom, more particularly the lower rate provided under the Article with respect to income from shipping and air transport, cannot be invoked by either residents of both Contracting States including VOSCO. Thus, in the absence of an effective tax treaty, VOSCO's taxable income for its shipping operations in the Philippines, if any, shall be subject to the taxes imposed under the Tax Code of 1997, more particularly to the three percent (3%) tax on international carriers on VOSCO's quarterly gross receipts derived from outgoing freight and passenger services which is a percentage tax, and to the 2 1/2 percent tax on its Gross Philippine Billings pursuant to Sections 118(B) and 28(A)(3) of the Tax Code of 1997, respectively. Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service