It is said that stability is one of the cornerstones for a sound tax system because a stable and consistent tax system promotes economic growth. This does not mean, however, that change should be avoided for an outdated and unchanging tax system may also become a liability in the future. But how can changes in the tax system be effectively implemented?
The reason I posed this question is because of the recent issuance by the tax authorities to streamline the procedures and documents for the availment of tax treaty benefits. The issuance could be relevant particularly for foreign investors looking to invest in the Philippines, as how relief at source can be claimed is a common consideration when making the business case for a project or investment. The issuance also affects withholding agents in the Philippines as they run the risk of being assessed deficiency withholding taxes if they fail to apply the correct withholding tax rate, or exempt the income payment from withholding should the nonresident turn out to be not qualified for exemption.
Under this new issuance, i.e. Revenue Memorandum Order (RMO) No. 14-2021, the withholding agent or income payor may rely on the submitted BIR Form No. 0901, or the Application Form for Treaty Purposes, Tax Residency Certificate (TRC) duly issued by the foreign tax authority, and the relevant provision of the applicable tax treaty on whether to apply a reduced rate of, or exemption from, withholding at source on the income derived by a nonresident taxpayer from all sources within the Philippines.
If the withholding agent will apply treaty rates on the income payment to the nonresident, the withholding agent shall file with the tax office a “request for confirmation” on the propriety of the withholding tax rates applied. On the other hand, if the withholding agent will apply the regular rates, or the rates as provided under the Tax Code, the nonresident shall file a Tax Treaty Relief Application (TTRA) with the tax office. In the latter case, the nonresident who has been subjected to regular rates may file a claim for refund for the difference between the amount of withholding tax actually paid in the Philippines and the amount of tax that would have been paid under the treaty together with or subsequent to filing the TTRA. The grant of the claim for refund will be dependent on the issuance of a positive ruling or certificate confirming the nonresident’s entitlement to treaty benefits.
Under the first scenario where the withholding agent will apply the treaty rates, the withholding agent has the obligation to file a request for confirmation with the tax office at any time after the payment of withholding tax but in no case later than the last day of the fourth month following the close of the taxable year. For taxpayers adopting the calendar year, this means that the request for confirmation should be filed with the tax office no later than April 30 of the year following the year the withholding was made.
If the tax authorities determine that the withholding tax rate applied is lower than the rate that should have been applied on an item of income pursuant to the treaty, or that the nonresident taxpayer is not entitled to treaty benefits, it will issue a ruling denying the request for confirmation or TTRA and the withholding agent shall pay the deficiency tax plus penalties.
One will note that the wordings of the RMO did not distinguish which income type should be covered by a request for confirmation and a TTRA, but the RMO is categorical that each request for confirmation and TTRA shall be supported by the general and specific documentary requirements set out therein. Does this mean that a request for confirmation, instead of a TTRA, can be filed for all types of income covered by a tax treaty, or vice versa?
RMO No. 14-2021 also provides that one request for confirmation or TTRA shall be filed for each transaction, except for long term contracts, where an annual updating shall be made until the termination of the contract. The RMO cites as an example a contract for consultancy services which has a term of five (5) years starting from January 1, 2020 to December 31, 2024. The RMO said that in this case, five (5) TTRAs shall be filed on or before April 30 of the following year. Note that the illustration mentioned only a TTRA, and is silent on whether the payments to the subject contract for services can be covered by a request for confirmation.
Comparing RMO No. 14-2021 with its predecessors, i.e. RMO Nos. 30-2002, 72-2010 and 08-2017, there are new general and specific documentary requirements that must be submitted to avail of treaty relief. Interestingly, the general requirements now include among others: (1) bank documents, certificate of deposit, telegraphic transfer, telex or money transfer evidencing the payment or remittance of income; (2) withholding tax return with Alphalist of Payees; and (3) proof of payment of withholding tax. These appear to be straight-forward, but its practical application may paint a different picture. Take the case of a transaction involving the sale of shares of a Philippine company between two nonresidents, or between a nonresident seller and a Philippine buyer. Tax treaties generally provide for exemption from Capital Gains Tax (CGT) on the part of the seller, whose home country has a treaty with the Philippines, subject to the condition that the requirements under the tax treaty are complied with. As the transaction is subject to CGT, and not withholding tax, how will the parties be able to comply with the requirement of submitting the withholding tax return and proof of payment of withholding tax? In addition, the parties may agree that payment of the selling price for the shares will be done only after fulfillment of certain milestones or conditions. Hence, while a deed of sale may already be executed, it does not always follow that payment has been remitted. In this case, how will the parties be able to comply with the requirement of submitting the proof of payment? Or does this mean that we should interpret the RMO to mean that only those documentary requirements that are applicable should be submitted?
In the case of business profits, there is now a specific requirement to submit a Bureau of Immigration Certification specifying the dates of arrival in and departure from the Philippines of individuals rendering services within the Philippines on behalf of the nonresident, a certificate of completion of the project signed by the recipient and withholding agent/payor, and, invoices issued by the income recipient.
In the case of interest, there is now a specific requirement to submit proof that the interest rate is at arm’s length, if the debtor and creditor are related parties. Does this mean that taxpayers who entered into a loan agreement with nonresident related parties are now required to prepare Transfer Pricing Documentation (TPD) to prove that the interest is at arms’ length? If yes, will it not run counter to the provisions of Revenue Regulations (RR) No. 34-2020 and Revenue Memorandum Circular (RMC) No. 54-2021 which made TPD mandatory only in the case of taxpayers who are required to file a BIR Form 1709 or the Related Party Transactions Form, and provided that the related party transaction meets certain thresholds?
For capital gains, there is now a specific requirement to submit an interim audited financial statement (AFS) as of the date of the transfer. However, the RMO is silent on whose AFS should be submitted. Is it possible that the RMO is referring to the AFS of the Philippine company whose shares are being sold? If yes, this may present an additional cost to the transacting parties, or to the Philippine company whose shares are being sold or transferred. Further, the willingness of the Philippine company whose shares are being sold or transferred to have its interim financial statements be audited will play a critical role because otherwise, the seller and the buyer will not be able to submit the interim AFS. If the Philippine company, for one reason or another, cannot have its interim financial statements audited in time, this may hamper or restrict the freedom of the parties - the seller and the buyer - to transact with each other. This may not pose a problem if the Philippine company is a wholly owned subsidiary, or if the seller exercises significant control over the Philippine company. But in cases when the seller has no significant control over or only owns a minimum number of shares in the Philippine company, this may become a point of contention. In the latter case, what will be the authority of the seller to require the Philippine company to prepare an interim AFS?
As RMO No. 14-2021 is new, it can be expected that there will be various questions surrounding it. It will be a welcome development if the tax authorities will issue further clarifications on the requirements. In the meantime, withholding agents and taxpayers availing of treaty relief should be mindful of this RMO as failure to submit a documentary requirement may lead to the denial of the request for confirmation or TTRA.
Laurice Claire C. Penamante is an Assistant Manager from the Tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.
This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email ph-inquiry@kpmg.com or rgmanabat@kpmg.com.