NOTES OF EXCHANGE 　　　　　　　　　　　　　　　　　　　　　　　　　　　　NOVEMBER 24, 1976. His Excellency, The Honorable CESAR VIRATA, Secretary of Finance. EXCELLENCY: I have the honor to refer to the recent discussions between representatives of our two Governments concerning 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. 　　It is our understanding that Philippine citizens residing outside of the Philippines are subject to Philippine tax on their worldwide income but at reduced rates of 1, 2, or 3 percent, and that foreign income taxes paid are deductible in computing their taxable income. We further understand that the Government of the Philippines, when applying paragraph 2 of Article 23 (Relief from Double Taxation) to such nonresident citizens, interprets the reference to "in accordance with the provisions of the law of the Philippines…" to allow the Government of the Philippines to continue to grant a deduction rather than a credit for U.S. taxes paid in such cases.We accepted this interpretation subject to confirmation by your Government that, should the present rates of Philippine income tax applicable to nonresident citizens of the Philippines be increased, the Government of the Philippines understands that the treaty would require a foreign tax credit and agrees to consult with the Government of the United States for the purpose of modifying this note to that effect. 　　I have the honor to propose to you that the present note and your Excellency 's reply thereto indicating acceptance constitute the agreement of our two Governments on these various points. 　　Accept, Excellency, the renewed assurances of my highest consideration. 　　For the United States Government: 　　　　　　　　　　　　　　　　　　　　　　　　　　WILLIAM E. SIMON. 　　　　　　　　　　　　　　　　　　　　　　　　　　November 24, 1976. His Excellency the Honorable WILLIAM E. SIMON, Secretary of the Treasury. 　　EXCELLENCY: I have the honor to acknowledge receipt of your note of November 24, 1976, which reads as follows: 　　"EXCELLENCY: I have the honor to refer to the recent discussions between representatives of our two Governments concerning 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. 　　It is our understanding that Philippine citizens residing outside of the Philippines are subject to Philippine tax on their worldwide income but at reduced rates of 1, 2, or 3 percent, and that foreign income taxes paid are deductible in computing their taxable income. We further understand that the Government of the Philippines, when applying paragraph 2 of Article 23 (Relief from Double Taxation) to such nonresident citizens, interprets the reference to "in accordance with the provisions of the law of the Philippines..." to allow the Government of the Philippines to continue to grant a deduction rather than a credit for U.S. taxes paid in such cases. We accept this interpretation subject to confirmation by your Government that, should the present rates of Philippine income tax applicable to nonresident citizens of the Philippines be increased, the Government of the Philippines understands that the treaty would require a foreign tax credit and agrees to consult with the Government of the United States for the purpose of modifying this note to that effect. 　　I have the honor to propose to you that the present note and your Excellency 's reply thereto indicating acceptance constitute the agreement of our two Governments on these various points. Accept, Excellency, the renewed assurances of my highest consideration.'' 　　I have the honor to inform your Excellency that the foregoing is acceptable and reflects correctly the understanding of the Government of the Republic of the Philippines and that your Excellency's note and this note in reply constitute an agreement between our two Governments concerning the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with respect to Taxes on Income signed at Manila on October 1, 1976. 　　Accept, Excellency, the renewed assurances of my highest consideration. For the Government of the Philippines: 　　　　　　　　　　　　　　　　　　　　　　　　　　　　CESAR VIRATA. 　　　　　　　　TEXT OF THE RESERVATIONS AND UNDERSTANDINGS 　　　　　　　　　　　OF THE UNITED STATES SENATE 　　The provisions of the United States Senate include two reservations and two understandings. 　　The first reservation is 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. 　　The second reservation is 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 under similar circumstances by a resident of a third state. 　　The two understandings are as follows: (1) An understanding that under Article 9 and paragraph (6) of Article 11 of the Treaty, 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 Treaty, a tax in addition to the tax which would be chargeable on the earnings of a Philippine corporation; and (2) an understanding that appropriate congressional committees and the General Accounting Office shall be afforded access to the information exchanged under this Treaty where such access to the information exchanged is necessary to carry out their oversight responsibilities, subject only to the limitations and procedures of the United States Internal Revenue Code.