The Philippines & EU-ASEAN FTA: Position on Double Taxation

Position Paper of the EU-Asean FTA Network on the Double Taxation Agreements signed by the Philippine Government with the governments of Kuwait, Qatar, Sri Lanka and Turkey and submitted to the Senate for Ratification.

To the Senate Committee on Foreign Relations

23 February 2012

The EU-Asean FTA Campaign Network-Philippines is network of NGOs and social movements monitoring negotiations for free trade agreements between the European Union and Asean Member States as well as global and regional trade and investment policies and their implications on the Philippines.

The network submits this position paper to the Senate Committee on Foreign Relations with regard to the ratification process of agreements/conventions on the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (double taxation treaties or DTTs) signed by the Philippine Government with the governments of Kuwait, Qatar, Sri Lanka and Turkey.

 DTTs and FDI: Weighing the Pros and Cons

For resource constrained developing countries like the Philippines, the main premise as we understand it, for entering these double taxation treaties (DTT) is to attract foreign direct investments (FDI). This contention is based on the logic that prevention of double taxation, which really translates to an incentive in the form of tax relief for foreign investors, would facilitate the entry of more investments.

Furthermore as some academics have put it, like bilateral investment treaties or BITS, DTTs also provide parties a certain badge of “international economic respectability,”[i] which in turn would make countries with a network of such treaties more attractive for investors.

The effectiveness however of such tax treaties in inducing higher FDI, as one study pointed out, is still open to debate.[ii] While indeed there are studies that assert that these treaties “create positive environment for foreign investors” particularly on cross-border equity flows[iii], generally the empirical evidence pointing to positive effect of DTTs on FDI “remains inconclusive.”[iv]

According to a report of the International Monetary Fund (IMF), “foreign investors, which are the primary targets of most tax incentives, base their decisions to enter a country on a whole host of factors, of which tax incentives are frequently far from being the most important.”[v]

A United Nations (UN) report on Tax Incentives and FDI: A Global Survey (2000) concluded that “it is generally recognised that investment incentives have only moderate importance in attracting FDI.”[vi]

Furthermore, there are also some legal experts who assert that “ubiquitous treaties are not necessary for preventing double taxation”, and may in fact have “much more cynical consequences, particularly redistributing tax revenues from the poorer to the richer signatory countries.”[vii]

While there may be supposed benefits from these treaties, there are also a number of costs and negative effects associated with them. A 2009 study by Barthel, Busse, and Neumayer on the Impact of DTTS on FDI outlined these effects as:[viii]

Administrative cost of negotiating and ratifying the contract. Given the length and labor intensity of the negotiations process and the additional effort of matching versions in different languages, the costs can be substantial especially, but not only, for smaller or developing countries.

Curtailment of national fiscal sovereignty, if provisions in the treaty conflict with domestic tax laws, which have to be adapted as a consequence.

Potential loss of tax revenues. DTTS that use the model of the Organization for Economic Cooperation and Development (OECD) regularly favor residence over source taxation. Entering a DTT therefore often leads to a loss of tax revenue in developing countries that is why capital importing developing countries tend to favor more the UN model treaty, which allows source taxation of short-term business activities.[ix]

The study concludes that “alongside the favourable impact of DTTS on FDI stocks, the potential negative effects of DTTs also have to be considered. Likewise, depending on the final outcome of the negotiations on the DTT, host countries potentially face losses in tax revenues. For many developing countries, these losses are not offset by tax reductions for domestic investors abroad due to the prevailing asymmetry in FDI stocks. As a consequence, EACH COUNTRY SHOULD CAREFULLY PONDER THE PROS AND CONS OF NEGOTIATING DTT.”

 Questions for the Philippine Government

To date, the Philippines has concluded around 35 (39 including the four treaties submitted to the Senate for ratification) such tax agreements with a diverse mix of countries.

We are in the dark however whether the Philippine government has an over-all framework for negotiating these agreements. What is the basis for example in having agreements with these 35 select countries? And what is the basis for the new agreements with Sri Lanka, Kuwait, Qatar and Turkey?

What DTT model was followed in the negotiations for these four new agreements? And what were the bases for preference over one model or aspects of one model to another?

While there are aspects of the four new agreements for instance that are akin to the UN model treaty particularly with regards to the duration test for determining permanent establishment (Article 5), some other aspects such as those pertaining to Dividends (Article 10), Interest (Article 11) and Royalties (Article 12) which states specific range of taxes allowed (from 10-15 % for the newer treaties with Kuwait, Qatar and Turkey concluded in 2009 and 15-25 % for the agreement with Sri Lanka concluded in 2000), are more in keeping with the OECD Model which is preferred by developed countries.

What role do DTTs play in the country’s foreign investment policy and how does this policy square with our over-all development goals?

Has the government undergone studies to look in to the effects of the 35 DTTs signed and in force on the country’s FDI stock? Are there studies on these four new agreements?

Does the government have an estimate how much revenues have been foregone as a result of these agreements?

These are some of the questions which we hope the representatives of the Executive branch through the concerned agencies would be able to shed light on in the course of these Senate deliberations on these four new agreements.

The answers would confirm whether or not the government exercised due diligence in entering into these agreements.

 Broader Issues and Concerns

The discussions on DTTs and FDIs should also be situated in the context of broader issues and concerns that have a bearing on the Philippines long term development objectives.

The issue of illicit capital outflows and the hollowing out effect on the Philippine economy- A study by Global Finance Integrity on the tax revenue loss from trade mispricing (2010) listed the Philippines as among the top countries with largest tax revenue loss in percent of government revenues. According to the study, from the period 2002-2006 the Philippines loss an average of around US$4.2 billion in tax revenues, representing 30 % of government revenues.[x] A more recent study by GFI summed up the total revenue loss from 2000-2008 to US$109 billion.[xi]

Trends in investment regimes favouring more investor protection and the contentious issue of investor state dispute settlement mechanism. The EU for example has recently approved negotiating mandates for investment protection measures under proposed free trade agreements (FTAs) with India, Singapore, Canada which seeks higher standards of market access and investor protection including among others provisions for unqualified national treatment, free transfer of capital, umbrella clause, and investor to state dispute settlement mechanism.[xii] The Philippine government is eyeing a bilateral trade agreement with the EU, negotiations for which would most likely be launched this year. The enhanced investment chapter is likewise expected to be an integral part of the negotiating agenda.

The investor to state dispute settlement (ISDS) mechanism stands out as one of the most contentious issues in the global investments regime. ISDS affords “investors the right to bring claims to governments before a panel of arbitrators with hardly any public participation or accountability.”[xiii] In the case of the Philippines, at least three foreign companies have filed claims against the Philippine government under the International Centre for the Settlement of Investment Disputes (ICSID) demanding compensation amounting to hundreds of millions of dollars.

 Lack of Information and the need for further discussion

Our network is likewise concerned with the lack of consultations and discussions on these agreements. We learned of these agreements only in the context of the hearings being conducted by the Senate Foreign Relations Committee. These agreements/conventions have been negotiated and signed by the Executive since 2000 in the case of the agreement with Sri Lanka, and 2009 for the agreements with Kuwait, Qatar and Turkey yet we have not heard of any public consultation conducted

In light of the above considerations, our network puts forward its position that international agreements such as these, which would have implications on national policies affecting particularly fiscal incentives and government revenues are matters of national interest and would necessitate broader public consultations, and a serious consideration of the pros and cons of entering these agreements. This more cautious and deliberate approach to negotiating DTTs and other such economic agreements is especially significant in light of the current context of a global investment regime that pushes investment liberalization and greater standards of investor protection on the one hand amidst the increasing resource constraints facing developing countries like the Philippines.


[i] Rosenbloom (1982) as cited in Barthel, Busse and Neumayer, The impact of DTTS on FDI: Evidence from Large Dyadic Panel Date. Western Economic Association International. 2009.

[ii] Barthel, Busse and Neumayer, The impact of DTTS on FDI: Evidence from Large Dyadic Panel Date. Western Economic Association International. 2009.

[iii] Parikh, B et al. The Impact of Double Taxation Treaties on Cross Border Equity Flows, Valuations and Cost of Capital. 2011.

[iv] Parikh, B et al. The Impact of Double Taxation Treaties on Cross Border Equity Flows, Valuations and Cost of Capital. 2011

[v] Tanzi, V and Zee, H (2001), Tax policy for developing countries. IMF Economic issue 27, Washington. See

[vi] UNCTAD (2000), Tax incentives and foreign direct investment: a global survey. United Nations, New York/Geneva, 2000, p.11 See

[vii] Dagan, T. The Tax Treaties Myth. NYU Journal of International Law and Politics. 939 (2000)

[viii] Barthel, Busse and Neumayer, The impact of DTTS on FDI: Evidence from Large Dyadic Panel Date. Western Economic Association International. 2009.

[ix] Tax Justice Briefing on Source and Residence Taxation. September 2005.

[x] Hollingshead, A. The Implied Tax Revenue Loss from Trade Mispricing.Global Financial Integrity. February 2010.

[xi]Kar, D and Curcio Karly.Illicit Financial Flows from Developing Countries :2000-2009. Update with a Focus on Asia. Global Financial Integrity. January 2011.

[xii]Llge, B., and Singh, K. Protecting Investors Rights:An assessment of EU’s New Mandate on International Investments. Madhyam Briefing Paper. October 2011. Available at Last visited 21 February 2012.

[xiii] Llge, B., and Singh, K. Protecting Investors Rights: An Assessment of EU’s New Mandate on International Investments. Madhyam Briefing Paper. October 2011. Available at Last visited 21 February 2012.