8 December 2021
Taxation of transnational income can sometimes be complex and perplexing. The intricacies are often a source of confusion, not to mention a burden on the taxpayer considering the time and cost associated with compliance with legal procedures. One way to ease the burden of international income taxation is through tax treaties — these may result either in the form of preferential tax rates or tax exemptions. With the objective of avoiding double taxation, the Philippines has concluded 43 tax treaties with several countries. However, the benefits of tax treaties have not always been fully utilized. This is in part due to the complexity of administrative processes to be complied with in order to claim these benefits.
In recent years, the Bureau of Internal Revenue (BIR) has made multiple changes to make it easier for non-resident taxpayers to avail themselves of tax treaty benefits. In its latest issuance, Revenue Memorandum Order (RMO) 14-2021, the BIR addressed several issues that non-resident taxpayers and withholding agents encountered with transnational transactions and provided a streamlined procedure in availing the tax treaty benefits.
Previously, RMO 1-2000 required any availment of tax treaty relief to be preceded by a TTRA with the International Tax Affairs Division (ITAD) at least fifteen (15) days prior to the transaction. Failure to file within the prescribed period entailed the waiver of the tax treaty benefits.
With the issuance of RMO 14-2021, the BIR has expressly instructed withholding agents to apply the preferential tax rates or exemption to the income of nonresidents in the Philippines, provided, prior to the first income payment, the nonresident submits to the withholding agent (i) the BIR Form 0901 or Application Form for Treaty Purposes, (ii) Tax Residency Certificate (TRC) duly issued by the foreign tax authority, and (iii) the relevant provision of the applicable tax treaty.
The preferential tax rates or exemption can already be applied outright by the withholding agent upon submission of the above-enumerated documents. However, the BIR further requires the withholding agent to file with ITAD a request for confirmation (RFC) on the propriety and validity of the application of the tax treaty benefits. The RFC may be filed at any time but shall not be later than the last day of the fourth month following the close of each taxable year. Should the ITAD deny the RFC, the withholding agent shall pay the deficiency tax with the corresponding penalties.
On the other hand, if the non-resident fails to provide the pertinent documents to the withholding agent, the withholding agent must apply the tax rates prescribed by the Tax Code. In this instance, the nonresident may still avail of the tax treaty benefits by filing a TTRA with the ITAD at any time after the receipt of the income. If the ITAD confirms that the nonresident is indeed entitled to the tax treaty benefits, the taxpayer may apply for a refund of excess withholding tax.
It is relevant to highlight that the BIR by virtue of RMO 14-2021 is now consistent with the Supreme Court cases of Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue (2013) and CBK Power Company Limited v. Commissioner of Internal Revenue (2015), which were also recently cited by the Court of Tax Appeals (CTA) in Commissioner of Internal Revenue v. DGA Ilijan B.V (2019). In said cases, it was ruled that a prior application for tax treaty relief is not required before a taxpayer can avail of the preferential tax treatment under the various Philippine tax treaties. The State’s compliance with tax treaty obligations must take precedence over the objective of a mere administrative issuance. These cases affirm the primacy of tax treaties over revenue regulations following the international law principle of “pacta sunt servanda,” which literally means agreements must be kept.
First published on The Daily Tribune.
For further information, please contact:
Nilo T. Divina, Managing Partner, DivinaLaw
nilo.divina@divinalaw.com
