VAT Ruling No. 027-01

May 22, 2001 VAT RULING NO. 027-01 Sections 28, 52, 118, & 128, NIRC Article 8, RP-Denmark Tax Treaty 000-00 Jardine Shipping Services A Division of Jardine Davies Transport Services, Inc. 5F, JS Contractor Bldg. 423 Magallanes Street Intramuros, Manila Attention: Penelope A . Dela Cruz Accounting Manager Gentlemen : This refers to your letter dated June 8, 2000 seeking clarifications on some tax-related matters. It is represented that Jardine Shipping Services (Jardine), a division of Jardine Davies Transport Services, Inc., is a shipping agency that caters to different international owners/principals; that being a local agent for and in behalf of international carriers, and to enable them to depart to their destination outside the Philippines, Jardine is paying three percent (3%) common carriers tax and two and a half percent (2 %) income tax based on Gross Philippine Billings; that your actual principal's place of business is in Denmark; and that such principal is claiming exemption from tax on the ground that their local shipper, Shell Gas Philippines, is registered with the Export Processing Zone Authority. It is your understanding that the 2 % income tax will vary depending on whether the respective country of these international carriers has an existing Tax Treaty with the Philippine government; and that your principal is not exempted because of the simple reason that its local shipper is exempt from the payment of taxes on international carriers. Based on the foregoing you would like to seek clarification on the following: "1) Is there any tax exemption for 2 % Income Tax and 3 % Common Carrier's Tax imposed to international carrier? "2) What will be the basis of place to ascertain International Carriers foreign address to avail Tax Treaty Agreement : 2 . a) Is it the place of the foreign vessel's owner management? 2 . b) Is it the place of the ship's registry? 2 . c) Is it the place of charterer's foreign address? "3) Who are liable to act and pay the freight tax (the 2 % and 3%) on behalf of International Carrier? 3 . a) Is it the local agent who receives foreign remittance from principal? 3 . b) Is it the local shipper/charterer? In reply, please be informed as follows: 1. A careful reading of the National Internal Revenue Code (Tax Code) of 1997 reveals that no tax exemption pertaining to income tax or the percentage tax is granted to international carriers. In fact, the Tax Code is explicit as to subject international carriers from income tax and the percentage tax. Thus, Sections 28 and 118 provides, viz : "SEC. 28 . Rates of Income Tax on Foreign Corporations. "(A) Tax on Resident Corporations . "(1) . . . "(3) International Carrier . An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 %) on its ' Gross Philippine Billings ' as defined hereunder: DICcTa "(a) International Air Carrier . . . . "(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. " . . . " " SEC. 118 . Percentage Tax on International Carriers . "(A) . . . "(B) International shipping carriers doing business in the Philippines shall pay a tax equivalent to three percent (3%) of their quarterly gross receipts." However, these international carriers may be relieved from payment of the whole 2 income tax imposed on their Gross Philippine Billings, as defined by the Tax Code, provided their transaction falls under the provisions of the Tax Treaties entered into by the Philippine Government. Article 8 of the RP-Denmark Tax Treaty provides, viz : "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. "xxx xxx xxx "4. If the place of effective management of a shipping enterprise is aboard a ship, then it shall be deemed to be situated in the Contracting State in which the home harbour of the ship is situated, or, if there is no such home harbour, in the Contracting State of which the operator of the ship is a resident. "xxx xxx xxx" The same Treaty defines; " international traffic " as any transport by a ship or aircraft operated by an enterprise which has its place of effective management in a Contracting State, except when the ship or aircraft is operated solely between places in the other Contracting State. [Article 3, par. 1 (g), RP-Denmark Tax Treaty] In view of the foregoing, your principal may be taxed not exceeding 1% on its Gross Philippine Billings, pursuant to the RP-Denmark Tax Treaty. Other international carriers, on the other hand, may also avail of the provision of an existing Tax Treaty provided it is covered thereby. However, the said relief pertains only to the income tax imposed on the Gross Philippine Billings of international carriers, and not to the percentage tax of 3% imposed on international carriers on their quarterly gross receipts. 2. An international carrier may avail of the provisions of a Tax Treaty provided it is clearly covered thereby. Thus, the question as to the criterion which determines on whether an international carrier may avail of the provisions of a Tax Treaty will depend on the Tax Treaty itself. Our existing Tax Treaties provide the residence criterion and/or the place of effective management as to confer the exclusive right to tax on the State of residence of international carriers. However, these Tax Treaties also grant the other concerned Contracting State the power to tax such international carriers but with limitation. 3. Section 52 of the Tax Code of 1997 provides, viz : " SEC. 52 . Corporation Returns . "(A) Requirements . Every corporation subject to the (income) tax herein imposed, except foreign corporations not engaged in trade or business in the Philippines, shall render, in duplicate, a true and accurate quarterly income tax return and final or adjustment return in accordance with the provisions of Chapter XII of this Title. The return shall be filed by the president, vice president or other principal officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer. "xxx xxx xxx" Further, Section 128 of the same Code provides, viz : " SEC. 128 . Return and Payment of Percentage Taxes . "(A) Returns of Gross Sales, Receipts or Earnings and Payment of Tax . "(1) Persons Liable to Pay Percentage Taxes . Every person subject to the percentage taxes imposed under this Title shall file a quarterly return of the amount of his gross sales, receipts or earnings and pay the tax due thereon within twenty-five (25) days after the end of each taxable quarter : Provided, That in the case of a person whose VAT registration is cancelled and who becomes liable to the tax imposed in Section 116 of this Code, the tax shall accrue from the date of cancellation and shall be paid in accordance with the provisions of this Section . "xxx xxx xxx" In view of the foregoing, the persons subject to the said taxes are the very persons through their representatives) who should file the corresponding tax returns. However, these do not preclude such international carriers, in their absence, from designating some other persons to act in their representations or on their behalf. Hence, the local agent who receives foreign remittances from its principal, upon proper designation, may act as the representative of the same. Consequently, the local agent may pay the taxes and file the corresponding returns on behalf of international carriers. Please be guided accordingly. Very truly yours, (SGD.) RENE G. BAEZ Commissioner of Internal Revenue