Article 24. NONDlSCRIMlNA TION

This l.rticle sets forth the general rules prohibiting discrimina• tory taxation of residents and corporations of one Contracting State by the other Contracting State. It also reserves to the Philippines the right to limit to its citizens or corporations certain tax incentives in carefully limited circumstances described in currently existing Philippine law.

Paragraph (1) provides that a citizen o! one Contracting State who is a resident o! the other Contracting State wil not be subject in that other Contracting State to more burdensome taxes than a citizen o! that other Contracting State who is a resident thereof. The determination of whether more burdensome taxation exists is to be made by comparing the treatment o! individuals who are in comparable positions. Thus. for example. a citizen of the Philippines who is a resident of the United States and who otherwise meets the requirements specified in section 911 of the Code would. under this Article. be eligible for the benefits of section 911 even though not a citizen of the United States, On the other hand. just as a United States citizen who becomes a nonresident

alien at any time during a taxable year or whose spouse is a nonresident alien at any time during a taxable year cannot file a joint return !or that year. a Philippine citizen would not be entitled to file a joint return with his spouse if either is a nonresident alien at any time during the taxable year and the election provided in section 6013(g) of the Code has not been made.

Paragraph (2) provides that a permanent establishment which a resident of one Contracting State has in the other Contracting State wil not be subject in that other Contracting State to more burdensome taxes than a resident of that other Contracting State carrying on the same activities, However. this does not obligate a Contracting State to grant to individual residents of the other Contracting State any personal allow• ances. reliefs. or deductions !or taxation purposes on account of civil

status or family responsibility which it grants its own individual residents.

Paragraph (3) prohibits one Contracting State from subjecting a corporation of such Contracting State the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more resi­ dents of the other Contracting State to any taxation or any requirement connected with taxation which is other or more burdensome than those applicable to corporations of the first-mentioned Contracting State carry­ ing on the same activities, the capital of which is wholly or partly ow.ned or controlled by one or more residents of the first-mentioned Contracting State.

Under paragraph (4), the term "taxes" or "taxation" means, for purposes of this Article, taxes or taxation of every kind imposed at the national, state or local level, notwithstanding any other provision of the Convention. However, for other purposes of the Convention, the term "tax" means tax imposed by the United States or the Philippines to which the Convention applies. See paragraph (l)(g) of Article 2 (General Definitions).

Paragraphs (5) and (6) are exceptions to the general rules set forth in paragraphs (l), (2), and (3). Paragraph (5) provides that, with respect to the income tax imposed under Title II of the Philippine Code, nothmg in paragraphs (l ), (?), and (3) will prevent the Philippines from limiting to its citizens or corporations the enjoyment of tax incentives granted under the following three provisions of Philippine law: section 6 of the Investment Incentives Act (Republic Act No. 5186); sections 5 and 7(b) of the Export Incentives Act (Republic Act No. 6135): and section 9 of the Investment Incentives Program for the Tourism Industry (Presi­ dential Decree No. 535). However, only the incentives which were in force on and have not been modified since Ocrober 1, 1976, the date of signature of the Convention, or have been modified only in minor respects so as not to affect their general character, may be limited to Philippine citizens or corporations.

The policy of the Investment Incentives Act, as expressed in section 2 thereof, is the acceleration of the sound development of the Philippine economy in consonance with the principles and objectives of economic nationalism.

The Investment Incentives Act, the Export Incentives Act, and the Investment Incentives Program !or the Tourism Industry represent a broad Philippine program to develop specific areas of the Philippine economy without relinquishing Philippine control thereover. Under that program, certain Philippine corporations can register with the Philippine

Board of Investments, and become registered enterprises. To register, generally, 60 percent of a Philippine corporation• s voting stock must be owned and controlled by Philippine nationals. If a registered enterprise is engaged in specified preferred economic areas of investment or be­ comes a pioneer enterprise, the corporation and its investors, both

foreign and Philippine, are entitled to specified economic or tax incen­ tives which are not otherwise granted by Philippine internal law. A pioneer enterprise is a registered enterprise that is engaged in the manufacture, processing, or production of goods, products, or raw materials that are not being produced in the Philippines on a commercial scale or is a registered enterprise which uses a design, formula, scheme, method, process, or system of production or transformation which is new or untried in the Philippines and which involves the sub­ stantial use and processing of Philippine raw materials.

The incentives granted under the provisions referred to in para­ graph (5) are limited, with one exception which relates to certain Philip­ pine corporations, to Philippine nationals. A Philippine national is a Philippine citizen, a partnership or association wholly owned by Philippine citizens, a Philippine corporation of which at least 60 percent of the outstanding voting shares are owned• and held by Philippine citizens, or trustees of certain_ pension tr.1�ts benefitting Philippine nationals.

The following thre incentives are granted by section 6 of the Invest­ ment Incentives Act to Philippine nationals who invest in pioneer enter­ prises. First, Philippine nationals are allowed a deduction from their taxable income (which cannot exceed 10 percent of taxable income) for an

investment of cash or property made in the form of an acquisition of shares in the original or increased capital stock of a pioneer enterprise. A deduction is allowed only if the investment is made within 7 years from the date of the corporation's registration and the shares are held for a period of not less than 3 years, In addition, Philippine nationals are granted an exemption from Philippine income tax for capital gains which are invested in new issues of capital stock of, or in the purchase of stock owned by foreigners in, pioneer enterprises. However, the investment must be made within 6 months from the date of realization of the gain and the stock must not be disposed of for 3 years. Finally, gain realized by Philippine nationals upon the disposition of stock dividends received from pioneer enterprises are exempt from tax, provided such disposition occurs within 7 years from the date of registration of the enterprise. Section 5 of the Export Incentives Act grants the same three incentives to Philippine nationals for investment in registered export producers that are pioneer enterprises. Section 9 of the Investment Incentives Program for the Tourism Industry grants only two of those incentives-­ the deduction for investment and the capital gains exemption--to Philippine nationals who invest in registe-red tourism enterprises.

Section 7(b) of the Export Incentives Act differs from the above des­ cribed tax incentives in that it applies to the export producer rather than the investor therein. Under that section, a registe.red export producer which is a Philippine citizen or a Philippine corporation of which 60 per­ cent of its capital is owned and controlled by Philippine citizens is entitled to a deduction from taxable income in an amount equivalent to the sum of the direct labor cost and local raw materials used in the manufacture of export products. That deduction JHay only be claimed during the 5-year period beginning on the date of its registration and cannot exceed 25 per­ cent of the registered export producer's taxable income.

Oher tax incentives found in the above described acts or the presi­ dential decree or In other acts or decrees which result ln more burden­ some taxation for United States persons resident in the Philippines, or Philippine corporations partly or wholly owned or controlled directly or indirectly by United States residents are subject to the general rules of paragraphs (1), (2), and (3), Thus, United States citizens will be eligible for these incentives. _

Paragraph (6) provides that, with respect to taxes other than the income tax imposed under Title D of the Philippine Code, nothing in the first three paragraphs will prevent the Philippines or a Political sub.: division or local authority thereof from limiting to Philippine citizens or corporations the enjoyment of tax incentives for the promotion of industry or business, similar to those discussed above in connection with paragraph (5), However, only the incentives which were in force on, and have not been modified since O:tober 1, 1976, the date of signature of the Convention, or have bee., modified only in minor respects so as not to affect their general character, may be limited to Phil ipine citizens or corporations.

A final exception to the general rules of paragraphs (l}, (2), and (3) relates to the taxation of income derived from the operation of ships and aircraft in international traffic. See the discus ion of Article 9 (Shipping and Air Transport), supra.