MARY THE QUEEN COLLEGE OF PAMPANGA, INC.

Jose Abad Santos Avenue, San Matias, Guagua, Pampanga

A.Y. 2017-2018

Research in Tax 1
(International Comity/Treaty)

Group 4
Hill M. Enriquez

Regine B. Manalac

Joy Ann Pamintuan

Lailyn S. Rivera

Christylinne Utulo

Allhiza S. Parico

Michael L. Ng, CPA, MBA

Professor
 International Treaty or Comity
Definition and Coverage
International Comity is the courteous recognition, friendly agreement, interaction and
respect accorded by one nation to the laws and institutions of another. Under Philippine Laws,
Treaties are international agreements entered into by the Philippines which require legislative
concurrence after executive ratification. This term may include compacts like conventions,
declarations, covenants and acts. Such treaty provisions are based on any of the following
grounds:

a. Sovereign equality among states under international law by virtue of which one state
cannot exercise its sovereign power over another.

b. The usage among states that when one enters the territory of another, there is an
implied understanding that the former does not intend to degrade its dignity by
placing itself under jurisdiction of the latter.

c. The rule of international law that a foreign government may not be sued without its
consent so that it is useless to assess tax since anyway it cannot be collected.

This principle limits the authority of the government to effectively impose taxes on a
sovereign state and its instrumentalities, as well as on its property held and activities undertaken
in that capacity. In general, tax treaties attempt to eliminate most forms of international double
taxation and various other forms of international double taxation when a failure to do so would
have a demonstrably harmful impact on international trade and investment. A major goal of
bilateral tax treaties is to remove impediments to international trade and investment by abating
the risk of double taxation that can occur when both contracting states impose tax on the same
income.

Under Revenue Memorandum Order (RMO) 01-2000 of the BIR, it is provided that the
availment of a tax treaty provision must be preceded by an application for a tax treaty relief with
its International Tax Affairs Division (ITAD). According to the Supreme Court, this is to prevent
any erroneous interpretation and/or application of the treaty provisions to which the Philippines
is a signatory. The implementation of the said RMO is in harmony with the objectives of the
contracting state to ensure that the granting of the benefits under the tax treaties are enjoyed
by the persons or corporations duly entitled to the same.

Foreign governments, embassies, diplomatic missions and international organizations in the

Philippines are exempt from the duty to withhold taxes on salaries and emoluments they pay
their employees. But Filipinos, whether as employees or officers, are not exempt from paying tax
on their salaries.

The immunity referred to under this rule refers actually to immunity from being constituted as
withholding agents of the Philippine government, which is accorded said foreign entities on the
basis of international comity as embodied in several international agreements to which the
Philippines is a signatory, e.g., Vienna Convention for International Relations, Convention on the
Privileges and Immunities of the United Nations.

Under RMC No. 31-2013, the exemption from withholding taxes on compensation of officials and
employees applies to foreign governments, embassies, diplomatic missions, and international
organizations, and that such exemption refers only to the obligation to collect tax, and therefore
does not equate to the exemption from paying the income tax itself.

However, most international agreements which grant withholding tax immunity to foreign
governments, embassies, diplomatic missions, and international organizations also grant
exemption to their officials and employees who are foreign nationals and/or non-Philippine
residents from paying income tax on their salaries and emoluments. In these instances, RMC 31-
2013 emphasizes that the exemption granted should apply only to those individuals who are
expressly and unequivocally identified in said international agreements or laws, and shall not
extend to those not specifically mentioned as tax exempt. Hence, Filipinos employed in these tax-
exempt organizations are not covered by the tax exemption, thus, their income from
employment is still subject to tax.

Capacity to enter into treaties

Every State possesses capacity to conclude treaties, according to Article 6 of the Vienna
Convention on the Law of Treaties.

In the Philippines, the President has the power to make treaties implicitly in the general
grant of authority in Section 1, Article VII that The executive power is vested in the President of
the Philippines, in particular as this is applied in foreign relations.

By constitutional fiat and by the intrinsic nature of his office, the President, as head of
State, is the sole organ and authority in the external affairs of the country. In many ways, the
President is the chief architect of the nations foreign policy; his dominance in the field of foreign
relations is (then) conceded. Being vested with diplomatic powers, the President formulates
foreign policy, deals with international affairs, represents the state with foreign nations,
maintains diplomatic relations, and enters into treaties or international agreements. Likewise,
the power granted to the Senate to concur in treaties is to be interpreted as referring to treaties
which the President makes and submits to the Senate for concurrence.

Normally, it is the Head of State or the Head of the Ministry of Foreign Affairs who binds
States in treaties. These persons do not need to produce evidence of full powers to conclude a
treaty. Treaty ratification is one of the incidents of their position. For purposes of adopting a text
to a treaty, the head of the diplomatic mission or accredited representatives of States to an
international conference or one of its organs are empowered to authenticate or accredit the text
of a treaty. If an act was performed without authorization or without the full powers, a treaty
can still be given force and effect provided it is subsequently confirmed by the State.

Parameters in the formulation and conduct of foreign policy

According to Justice Isagani Cruz, in his book on International Law, the usual steps in the
treaty-making process are: negotiation, signature, ratification, and exchange of the instruments
of ratification. The treaty may then be submitted for registration and publication under the U.N.
Charter, although this step is not essential to the validity of the agreement as between the
parties.

The substantive content of Philippine foreign policy is anchored on the Constitution,

specifically the precepts that in the countrys relations with other states the paramount
consideration shall be national sovereignty, territorial integrity, national interest, and the right
to self-determination, and that the country adheres to the policy of peace, equality, justice,
freedom, cooperation, and amity with all nations. Thus:

Article II, Section 2. The Philippines renounces was an instrument of national policy,
adopts the generally accepted principles of international law as part of the law of the land and
adheres to the policy of peace, equality, justice, freedom, cooperation, and amity with all nations.

Article II, Section 7. The State shall pursue an independent foreign policy. In its relations
with other states the paramount consideration shall be national sovereignty, territorial integrity,
national interest, and the right to self-determination.

The above is supplemented by the foreign policy priorities of the President of the
Philippines, as the chief architect of foreign policy, and his Secretary of Foreign Affairs. On the
other hand, the procedural dimension of foreign policy-making, which is the ambit of Philippine
treaty law and practice, is based on the following:
 (a) The Philippine Constitution, specially Article VII, Section 21 which states, 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;

(b) The ruling of the Supreme Court of the Philippines in Commissioner of Customs vs.
Eastern Sea Trading, which made a distinction between treaties and executive agreements, the
latter requiring the ratification by the President in order to take effect, and related jurisprudence;
and

(c) Executive Order No. 459, series of 1997, which sets the guidelines in the negotiation,
conclusion and ratification of international agreements.

Reasons for entering into Tax Treaties

To facilitate outbound investment by residents by:
Removing or reducing double taxation on investment in the other
country;
Reducing excessive source country taxation;
In the case of low-tax countries, creating a competitive advantage
for its residents by reducing or removing source taxation;

To facilitate outbound investment by residents by:

Removing or reducing tax discrimination on investment in the
other country;
Providing certainty and/or simplicity with respect to taxation on
investment in the other country on out- bound investment by
residents.

To facilitate and encourage inbound investment and inbound

transfers of skills and technology by residents of the other country by:
Removing or reducing double taxation on the inbound investment
or transfers;
Reducing excessive source taxation;
Providing increased certainty and/or simplicity with respect to
taxation of the inbound investment or transfers;
To facilitate and encourage inbound investment and inbound
transfers of skills and technology by residents of the other country by:
 Developing a closer relationship between tax authorities and
business;
Maintaining benefits of tax concessions and tax holidays provided
with respect to inbound investment or transfers.

To reduce cross-border tax avoidance and evasion through:

Exchange of tax information;
Mutual assistance in collection of taxes.

For political reasons, such as:

Sending a message of willingness to adopt international tax norms;
Fostering diplomatic or other relations with the other country;
Strengthening regional diplomatic, trade and economic ties;
Complying with international obligations;
Responding to pressure from the other country.

List of Countries with Tax Treaty with the Philippines

1. Australia 22. Malaysia
2. Austria 23. Netherlands
3. Bahrain 24. New Zealand
4. Bangladesh 25. Nigeria
5. Belgium 26. Norway
6. Brazil 27. Pakistan
7. Canada 28. Poland
8. China 29. Qatar
9. Czech 30. Romania
10. Denmark 31. Russia
11. Finland 32. Singapore
12. France 33. Spain
13. Germany 34. Sweden
14. Hungary 35. Switzerland
15. India 36. Thailand
16. Indonesia 37. Turkey
17. Israel 38. United Arab Emirates
18. Italy 39. United Kingdom of Great Britain and
19. Japan Northern Ireland
20. Korea 40. United States of America
21. Kuwait 41. Vietnam
Examples of Income Cases under Tax Treaty
1.) Compensation Income
Subject to the provisions of Articles 16, 18, 19 and 20, salaries, wages and other similar
remuneration derived by an individual who is a resident of one of the Contracting States in
respect of an employment shall be taxable only in that State unless the employment is exercised
in the other Contracting State. If the employment is so exercised, such remuneration as is derived
from that exercise may be taxed in that other State. (Tax Treaty between Australia and
Philippines)

2.) Income from Immovable Property

Income from immovable property including income from agriculture or forestry
may be taxed in the Contracting State in which such property is situated. (Tax Treaty between
Canada and Philippines)

3.) Business Profits

The profits of an enterprise of a Contracting State shall be taxable only in that
State unless the enterprise carries on business in the other Contracting State through a
permanent establishment situated therein. If the enterprise carries on business as aforesaid, the
profits of the enterprise may be taxed in the other State, but only so much of them as is attributable
to that permanent establishment. (Tax Treaty between China and Philippines)

4.) Dividends
Dividends paid by a company which is a resident of a Contracting State to a resident of
the other Contracting State may be taxed in that other State. However, such dividends may also
be taxed in the Contracting State of which the company paying the dividends is a resident and
according to the law of that State, but if the recipient is the beneficial owner of the dividends the
tax so charged shall not exceed:
a) 15 percent of the gross amount of the dividends if the beneficial owner is a company;
b) 25 percent of the gross amount of the dividends in all other cases.
The competent authorities of the Contracting State shall by mutual agreement settle the mode
of application of these limitations. This paragraph shall not affect the taxation of the company in
respect of the profits out of which the dividends are paid. (Tax Treaty between New Zealand and
Philippines)

5.) Royalties
Royalties arising in a Contracting State and paid to a resident of the other
Contracting State may be taxed in that other State, if such resident is the beneficial owner of the
royalties. Such royalties may also be taxed in the Contracting State in which they arise, and
according to the laws of that State. However, if the recipient is the beneficial owner of the
royalties:
a) In the case of Malaysia:
(i) The tax so charged shall not exceed 15 per cent of the gross amount of the
royalties; and
(ii) Approved industrial royalties derived from Malaysia by a resident of the
Philippines shall be exempt from tax.
b) In the case of the Philippines: the tax so charged shall not exceed:
(i) 15 per cent of the gross amount of the royalties where the royalties are paid
by a registered enterprise as well as royalties defined in paragraph 4(a) (ii); and
(ii) 25 per cent of the gross amount of the royalties in all other cases.