Convention 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 (S. 　　　　Ex. C, 95th Cong., 1st Sess.); 　　Reported Favorably by the Senate Committee on Foreign Relations 　　December 4, 1981 (S. Ex. 　　　　Rept. 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; 　　Entered into Force October 16, 1982. GENERAL EFFECTIVE DATE UNDER ARTICLE 29: 1 JANUARY 1983 TABLE OF ARTICLES Article 1----------------------------------Taxes Covered Article 2----------------------------------General Definitions Article 3----------------------------------Fiscal Residence Article 4----------------------------------Source of Income Article 5----------------------------------Permanent Establishment Article 6----------------------------------General Rules of Taxation Article 7----------------------------------Income from Real Property Article 8----------------------------------Business Profits Article 9----------------------------------Shipping and Air Transport Article 10---------------------------------Related Persons Article 11---------------------------------Dividends Article 12---------------------------------Interest Article 13---------------------------------Royalties Article 14---------------------------------Capital Gains Article 15---------------------------------Independent Personal Services Article 16---------------------------------Dependent Personal Services Article 17---------------------------------Artistes and Athletes Article 18---------------------------------Private Pensions and Annuities Article 19---------------------------------Social Security Payments Article 20---------------------------------Governmental Functions Article 21---------------------------------Teachers Article 22---------------------------------Students and Trainees Article 23---------------------------------Relief from Double Taxation Article 24---------------------------------Non-discrimination Article 25---------------------------------Mutual Agreement Procedure Article 26---------------------------------Exchange of Information Article 27---------------------------------Assistance in Collection Article 28---------------------------------Diplomatic and Consular Officers Article 29---------------------------------Entry into Force Article 30---------------------------------Termination Letter 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 　　　　　　　　　　　　　　　MESSAGE 　　　　　　　　　　　　　　　FROM 　　　　　　　　THE PRESIDENT OF THE UNITED STATES 　　　　　　　　　　　　　TRANSMITTING 　　THE CONVENTION SIGNED AT MANILA ON OCTOBER 1, 1976, BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES WITH RESPECT TO TAXES ON INCOME, AND AN EXCHANGE OF NOTES BETWEEN SECRETARY OF THE TREASURY WILLIAM E. SIMON AND SECRETARY OF FINANCE CESAR VIRATA INTERPRETING ARTICLE 23(2) OF THE CONVENTION, DONE AT WASHINGTON ON NOVEMBER 24, 1976 LETTER OF SUBMITTAL DEPARTMENT of STATE, Washington, D.C., January 12, 1977. THE PRESIDENT, The White House. 　　THE PRESIDENT: I have the honor to submit to you, with a view to its transmission to the Senate for advice and consent to ratification, the Convention between the Government of the United States of America and the Government of the Republic of the Philippines with Respect to Taxes on Income, signed at Manila on October 1, 1976, and an exchange of notes between Secretary of the Treasury William E. Simon and Secretary of Finance Cesar Virata interpreting Article 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 United States in recent years. It deals mainly with Federal income taxes in the case of the United States and with generally equivalent income taxes specified in Article l (l)(b) in the case of the Philippines. Article 24, relating to nondiscrimination, applies, however, to taxes of every kind imposed at the national, state, or local level. 　　The Convention establishes maximum rates of withholding tax in the source country on income payments flowing to residents of the other country. It reduces the statutory rates of 30 percent in the United States and 35 percent in the Philippines, so that the maximum rate of withholding tax under the treaty is 25 percent on portfolio dividends and 20 percent on dividends paid to a parent corporation owning 10 percent or more of the voting shares. The 20 percent limit applies as well to the additional Philippine tax on profits of United States corporations derived through Philippine branches. Since the Philippine corporate tax rate is 35 percent, these limits should ensure that the Philippine tax will be fully creditable to United States corporations. The Convention provides a maximum tax at the source of 15 percent on interest in general, 10 percent on public bond issues, and an exemption of interest paid to the Government of one of the Contracting States or an instrumentality thereof, or interest on debt guaranteed or insured by that Government or instrumentality. In the case of royalties the Convention provides a limit of 15 percent at the source for the United States. The Philippine tax at source is also limited to 15 percent provided that the paying corporation is registered with the Board of Investments and engages in preferred areas of activity. In other cases the Philippine tax is limited to 25 percent or to a lower rate if a lower rate applies on comparable payments to residents of third states. This most-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 of tangible property as royalties. 　　The taxation of business profits derived by a resident of the other country is governed by the standard treaty concept that tax liability will arise only to the extent that the profits are attributable to a "permanent establishment" in the taxing country. 　　The Convention does not contain the usual reciprocal exemption of shipping and airline profits. The Philippines is strongly opposed to such an exemption and has not agreed to it in any other treaty. They agreed to reduce their statutory tax from 2 1/2 to I 1/2 percent of gross receipts on outbound traffic and to provide in the treaty that the tax may not exceed the lower of the 1 1/2 percent rate or any lower tax agreed to with a third country. The United States accepted this position with respect to shipping profits but excluded United States airlines from this provision at the request of representatives of the airlines. 　　Income derived by a resident of one country from performing personal services in the other country is exempt from tax by that other country unless the individual remains there 90 days or longer during the year or, in the case of services performed in an independent capacity, if the gross remuneration exceeds $10,000 or a higher amount agreed to by the tax authorities of the two countries; although gross remuneration determines whether a tax liability arises, the tax would be imposed on net income. The 90-day period is consistent with the United States statutory rule concerning employees of foreign companies in the United States. The condition for exemption of entertainers performing services in the other country is that the income for such services not exceed the lesser of $100 per day or $3,000 per year. 　　The non-discrimination issue is of great importance to both countries. The Convention affirms the principle of non-discriminatory tax treatment with respect to all taxes, but allows the Philippines to reserve to Philippine nationals incentives granted under specific provisions of existing law. These exceptions in brief permit: (1) a deduction for certain amounts invested in new shares of pioneer industries and a shorter holding period to qualify for capital gains treatment on the sale of such shares; (2) a deduction for certain local costs of export production to firms which are 60 percent Philippine owned; and (3) limited incentives to investment in tourist facilities. 　　The notes interpreting Article 23 (2) of the Convention extend United States approval to the Philippine practice of permitting a foreign tax deduction to Philippine citizens abroad, rather than a foreign tax credit, so long as the rates of tax currently in effect remain unchanged. 　　A technical memorandum explaining in detail the provisions and effect of the Convention is being prepared by the Department of the Treasury and will be submitted to the Senate Foreign Relations Committee for consideration in connection with the Convention. 　　This Convention will enter into force 30 days after the exchange of instruments of ratification and will have effect with respect to withholding taxes on the following January 1, and with respect to other taxes will have effect for taxable years beginning on or after January 1 of the year following entry into force. The Convention will then remain in force for five years and thereafter until terminated by either State. Such termination may be effected by six months' written notice at any time after the initial five year-period. In that event the Convention will cease to have force with respect to income of years beginning on or after January 1 next following the six-month period. 　　The Department of the Treasury, with the cooperation of the Department of State, was primarily responsible for the negotiation of this Convention. It has the approval of both Departments. Respectfully submitted, SECRETARY OF STATE LETTER OF TRANSMITTAL THE WHITE HOUSE, January 19, 1977. To the Senate of the United States: 　　I submit herewith, for Senate advice and consent to ratification, the Convention signed at Manila on October 1, 1976, between the Government of the United States of America and the Government of the Republic of the Philippines with Respect to Taxes on Income, and an exchange of notes between Secretary of the Treasury William E. Simon and Secretary of Finance Cesar Virata interpreting Article 23(2) of the Convention, done at Washington on November 24, 1976. 　　There is no convention on this subject presently in force between the United States and the Philippines. 　　The Convention follows generally the form and content of most conventions of this type recently concluded by this government. Its primary purpose is to identify clearly the tax interests of the two countries so as to avoid double taxation and makes difficult the illegal evasion of taxation. The exchange of notes confirms that certain provisions of the Philippines tax system comply with the Convention. 　　I also transmit, for the information of the Senate, the report of the Department of State with respect to the Convention. 　　Conventions such as this one are an important element in promoting closer economic cooperation between the United States and other countries. I urge the Senate to act favorably on this Convention at an early date and give its advice and consent to ratification. GERALD R. FORD. BY THE PRESIDENT OF THE UNITED STATES OF AMERICA A PROCLAMATION CONSIDERING THAT: 　　The Convention between the United States of America and the Republic of the Philippines with Respect to Taxes on Income was signed at Manila on October 1, 1976, and an exchange of notes interpreting Article 23(2) of the Convention was signed at Washington on November 24, 1976, the texts of which are hereto annexed; 　　The Senate of the United States of America by its resolution of December 16, 1981, twothirds of the Senators present concurring therein, gave its advice and consent to ratification of the Convention and interpretative notes, subject to the following: 　　(1) reservation that, notwithstanding the provisions of Article 14 relating to capital gains, both the United States and the Philippines may tax gain from the disposition of an interest in a corporation if its assets consist principally of a real property interest located in that country. Likewise, both countries may tax gain from the disposition of an interest in a partnership, trust or estate to the extent the gain is attributable to a real property interest in one of the countries. The term "real property interest" is to have the meaning it has under the law of the country in which the underlying real property is located; 　　(2) reservation that, notwithstanding the provisions of paragraph (2) of Article 9 of the Convention, the tax imposed on profits derived by a resident of one of the Contracting States from sources within the other Contracting State from the operation of aircraft in international traffic may be as much as, but shall not exceed, the lesser of one and one-half percent of the gross revenue derived from sources within that State, and the lowest rate of Philippine tax that may be imposed on profits of the same kind derived under similar circumstances by a resident of a third State; 　　(3) understanding that under Article 9 and paragraph (6) of Article 11 of the Convention, the Philippines may not impose on the earnings of a corporation attributable to a permanent establishment in the Philippines, which earnings are described in Article 9 of the Convention, a tax in addition to the tax which would be chargeable on the earnings of a Philippine corporation; and 　　(4) understanding that appropriate Congressional committees and the General Accounting Office shall be afforded access to the information exchanged under this Convention where such access to the information exchanged is necessary to carry out their oversight responsibilities, subject only to the limitations and procedures of the Internal Revenue Code The Convention, together with the interpretive notes, was ratified, subject to the aforesaid reservations and understandings by the President of the United States of America on January 20, 1982, in pursuance of the advice and consent of the Senate, and was ratified on the part of the Republic of the Philippines; 　　The instruments of ratification of the Convention and interpretative notes were exchanged at Washington on September 6, 1982, and accordingly the Convention enters into force on October 16, 1982, effective as specified in Article 29 of the Convention; 　　NOW, THEREFORE, I, Ronald Reagan, President of the United States of America, proclaim and make public the Convention and interpretative notes to the end that they be observed and fulfilled with good faith on and after October l6, 1982, by the United States of American and by the citizens of the United States of America and all other persons subject to the jurisdiction thereof. 　　IN TESTIMONY WHEREOF, I have signed this proclamation and caused the Seal of the United States of America to be affixed. 　　DONE at the city of Washington this fourth day of October in the year of our Lord one thousand nine hundred eighty-two and of the Independence of the United States of America the two hundred seventh. By the President: RONALD REAGAN GEORGE P. SCHULTZ. Secretary of State