INCOME TAX CONVENTION WITH THE REPUBLIC OF THE …

1 INCOME TAX CONVENTION WITH THE REPUBLIC OF THE PHILIPPINES,AND AN EXCHANGE OF NOTESC onvention Signed at Manila October 1, 1976;With Exchange of Notes Signed at Washington November 24, 1976;Transmitted by the President of the United States of America to the Senate January 19, 1977 ( C, 95th Cong., 1st Sess.);Reported Favorably by the Senate Committee on Foreign Relations December 4, 1981 (S. No. 97-39, 97th Cong., 1st Sess.);Advice and Consent to Ratification by the Senate, with Reservations and Understandings,December 16, 1981;Ratified by the President, Subject to Said Reservations and Understandings, January 20,1982;Ratified by the Philippines September 1, 1982;Ratifications Exchanged at Washington September 16,1982;Proclaimed by the President October 16, 1982.

2 Entered into Force October 16, EFFECTIVE DATE UNDER ARTICLE 29: 1 JANUARY 1983 TABLE OF ARTICLESA rticle 1----------------------------------Taxes CoveredArticle 2----------------------------------Gener al DefinitionsArticle 3----------------------------------Fisca l ResidenceArticle 4----------------------------------Sourc e of IncomeArticle 5----------------------------------Perma nent EstablishmentArticle 6----------------------------------Gener al Rules of TaxationArticle 7----------------------------------Incom e from Real PropertyArticle

3 8----------------------------------Busin ess ProfitsArticle 9----------------------------------Shipp ing and Air TransportArticle 10---------------------------------Relat ed PersonsArticle 11---------------------------------Divid endsArticle 12---------------------------------Inter estArticle 13---------------------------------Royal tiesArticle 14---------------------------------Capit al GainsArticle 15---------------------------------Indep endent Personal ServicesArticle 16---------------------------------Depen dent Personal ServicesArticle 17---------------------------------Artis tes and AthletesArticle 18---------------------------------Priva te Pensions and AnnuitiesArticle 19---------------------------------Socia l Security PaymentsArticle 20---------------------------------Gover nmental FunctionsArticle 21---------------------------------Teach ersArticle 22---------------------------------Stude nts and TraineesArticle 23---------------------------------Relie f from Double TaxationArticle

4 24---------------------------------Non-d iscriminationArticle 25---------------------------------Mutua l Agreement ProcedureArticle 26---------------------------------Excha nge of InformationArticle 27---------------------------------Assis tance in CollectionArticle 28---------------------------------Diplo matic and Consular OfficersArticle 29---------------------------------Entry into ForceArticle 30---------------------------------Termi nationLetter of Submittal-----------------------of 12 January, 1977 Letter of Transmittal---------------------of 19 January, 1977 Notes of Exchange-----------------------of 24 November, 1976 The Saving Clause ---------------------Paragraph 3 of Article 6 MESSAGEFROMTHE PRESIDENT OF THE UNITED STATESTRANSMITTINGTHE CONVENTION SIGNED AT MANILA ON OCTOBER 1, 1976, BETWEENTHE GOVERNMENT OF THE UNITED STATES OF AMERICA ANDTHE GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES WITH RESPECT TOTAXES ON INCOME , AND AN EXCHANGE OF NOTESBETWEEN SECRETARY OF THE TREASURY WILLIAM E.

5 SIMON ANDSECRETARY OF FINANCE CESAR VIRATA INTERPRETING ARTICLE 23(2) OF THECONVENTION, DONE AT WASHINGTON ON NOVEMBER 24, 1976 LETTER OF SUBMITTALDEPARTMENT of STATE,Washington, , January 12, PRESIDENT,The White House. THE PRESIDENT: I have the honor to submit to you, with a view to its transmission to theSenate for advice and consent to ratification, the CONVENTION between the Government of theUnited States of America and the Government of the REPUBLIC of the Philippines with Respect toTaxes on INCOME , signed at Manila on October 1, 1976, and an exchange of notes betweenSecretary of the Treasury William E.

6 Simon and Secretary of Finance Cesar Virata interpretingArticle 23(2) of the CONVENTION , done at Washington on November 24, 1976. The CONVENTION is similar in its essential respects to other treaties entered into by the UnitedStates in recent years. It deals mainly with Federal INCOME taxes in the case of the United Statesand with generally equivalent INCOME taxes specified in Article l (l)(b) in the case of thePhilippines. Article 24, relating to nondiscrimination, applies, however, to taxes of every kindimposed at the national, state, or local level.

7 The CONVENTION establishes maximum rates of withholding tax in the source country onincome payments flowing to residents of the other country. It reduces the statutory rates of 30percent in the United States and 35 percent in the Philippines, so that the maximum rate ofwithholding tax under the treaty is 25 percent on portfolio dividends and 20 percent on dividendspaid to a parent corporation owning 10 percent or more of the voting shares. The 20 percent limitapplies as well to the additional philippine tax on profits of United States corporations derivedthrough philippine branches.

8 Since the philippine corporate tax rate is 35 percent, these limitsshould ensure that the philippine tax will be fully creditable to United States corporations. TheConvention provides a maximum tax at the source of 15 percent on interest in general, 10percent on public bond issues, and an exemption of interest paid to the Government of one of theContracting States or an instrumentality thereof, or interest on debt guaranteed or insured by thatGovernment or instrumentality. In the case of royalties the CONVENTION provides a limit of 15percent at the source for the United States.

9 The philippine tax at source is also limited to 15percent provided that the paying corporation is registered with the Board of Investments andengages in preferred areas of activity. In other cases the philippine tax is limited to 25 percent orto a lower rate if a lower rate applies on comparable payments to residents of third states. Thismost-favored nation provision means that the philippine tax on film rentals will be 10 percent,because that rate appears in their treaty with Sweden. The Philippines agreed not to tax rentals oftangible property as royalties.

10 The taxation of business profits derived by a resident of the other country is governed by thestandard treaty concept that tax liability will arise only to the extent that the profits areattributable to a "permanent establishment" in the taxing country. The CONVENTION does not contain the usual reciprocal exemption of shipping and airlineprofits. The Philippines is strongly opposed to such an exemption and has not agreed to it in anyother treaty. They agreed to reduce their statutory tax from 2 to I percent of gross receiptson outbound traffic and to provide in the treaty that the tax may not exceed the lower of the 1 percent rate or any lower tax agreed to with a third country.