Article 9 permits a Contracting .State to impose a tax on fo;? profits

derived from sources therein by a resident of the other Contracting State

from the operation of ships or aircraft in international traffic, In so providing, it departs from the shipping and air transport article which customarily appears in income tax conventions of the United States,

Under paragraph (l). proH;s <'¶rived by a resident of one Con­ tracting State from sources within the other Contracting State from the operation of ships in international traffic may be taxed by both Contract­ ing States. However. a limitation is placed on the amount of tax which may be imposed by the country of source. The tax imposed by the coun­ try pf source, the "other Contracting State," may be as much as, but shall not exceed l. 5 percent of the gross revenues derived from sources in that State (as determined under paragraph (7) of Article 4 (Source of Income)) or the lowest rate of Philippine tax that may be imposed on profits of the same kind derived under similar circumstances by a resl­ dent of a third State, whichever is less. Under that formula, for example. a Philippine corporation which operates ·ships between Manila and Hawaii and which engages in no other trade or business will determine its United States income tax in the following manner, First, it will compute a tenta­ tive tax under Code section 882 on the taxable income which is effectively connected with the conduct of its trad· or business within the United States, using the source rule which appears in Code section 863, Then, it will compute the limitation under paragraph (1) by multiplying its gross revenues from United States sources, using the source rule which appears in paragraph (7) of Article 4 (Source of Income), by 1. 5 percent, The lower of those two figures is its United States income tax. The reciprocal exemptions of Code sections 872(b) and 883(a) do not apply to Philippine residents because the Philippines imposes a tax on the earnings of foreign carriers in the amount of 2. 5 percent of their gross Philippine billings,

Paragraph (2) states that nothing in the Convention affects the right of a Contracting State to tax, under its domestic laws, profits derived by a resident of the other Contracting State from sources within the first­ mentioned Contracting State from the operation of aircraft in international traffic. Thus, although the United States and the Republic of the Philippines have placed a limitation in the Convention on the ta:xation of income from the operation of ships in international traffic, they have not agreed to such a provision with respect to income derived from the operation of aircraft in international traffic. Such income will be taxed in accordance with the tax legislation of each of the Contracting States.

The tax under paragraphs (1) and (2) may be imposed notwithstanding any other provisions of the Convention, including Article 24 (Nondiscri­ mination), Under paragraph (2) of Article 24, a permanent establishment which a resident of one Contracting State has in the other Contracting Stati; will not be subject in the other Contracting State to more burden­ some taxes than a resident of that other Contracting State carrying on the same activites.

It is possible that, under this Article, United States residents opera­ ting ships and aircraft in international traffic may be subject to more burdensome taxation in the Philippines than Philippine corporations. For

example, Philippine air carriers, other than Philippine Air Lines, and shipping companies enjoy recurring 10-year exemptions from Philippine income tax on income derived from international traffic. Philippine

Air Lines is subject to a franchise tax of 2 :oercent of gross income in lieu of all Philippine taxes, Should the President find that, with respect to profits from the operation of ships or aircraft in international traffic, United States citizens or corporations are being subjected to a higher effective rate of Philippine tax than are Philippine citizens, residents, or corporations, Articles 9 and 24 do not prevent the adjust­ ment o! United States income tax under Code section 896.

Paragraph (3) provides that paragraphs (1) and (2) apply to profits derived from the participation in a pool, a joint business venture, or in an international operating agency,

This Article is subject to the saving clause of paragraph (3) of Article 6 (General Rules of Taxation). Therefore, a Contracting State may tax income from international traffic derived by a resident of the other Contracting State without regard to this Article if such resident is a citizen of the first-mentioned Contracting State,