Philippines: Updated guidelines for tax treaty relief
Guidance intended to streamline procedures and documents for taxpayers seeking to take advantage of income tax treaty benefits
Guidance intended to streamline procedures and documents of income tax treaty benefits
The tax authorities issued guidance intended to streamline the procedures and documents for taxpayers seeking to take advantage of income tax treaty benefits.
Revenue Memorandum Order (RMO) No. 14-2021 provides a 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) for purposes of determining 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 seeks to apply treaty rates on the income payment to the nonresident, the withholding agent must file with the tax office a “request for confirmation” on the propriety of the withholding tax rates applied.
- If, however, the withholding agent seeks to apply the regular rates, or the rates as provided under the tax law, the nonresident must file a “Tax Treaty Relief Application” (TTRA) with the tax office. In such 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 depend on the issuance of a positive ruling or certificate confirming the nonresident’s entitlement to treaty benefits.
Under the first scenario when the withholding agent applies the treaty rates, the withholding agent has an 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 tax year. For taxpayers adopting the calendar year, this means that the request for confirmation must be filed with the tax office no later than 30 April 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 would 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 must pay the deficiency tax plus penalties.
RMO No. 14-2021 also provides that one request for confirmation or TTRA is to be filed for each transaction, except for long-term contracts when an annual updating is to be made until the termination of the contract. RMO No. 14-2021 cites as an example a contract for consultancy services that has a term of five years starting from 1 January 2020 through 31 December 2024. In this instance, five TTRAs are to be filed on or before 30 April of the following year. Note that this example mentions 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 against its predecessors (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. The general requirements now include: (1) bank documents, certificate of deposit, telegraphic transfer, telex or money transfer evidencing the payment or remittance of income; (2) withholding tax return with “Alpha-list 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.
Consider 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 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 satisfied. As the transaction is subject to capital gains tax, 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 instance, how will the parties be able to comply with the requirement of submitting the proof of payment? Or does this mean that the RMO is to be interpreted to mean that only those documentary requirements that are applicable are to 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.
For capital gains, there is now a specific requirement to submit an interim audited financial statement as of the date of the transfer. However, the RMO is silent on whose audited financial statement is to be submitted.
The issuance of RMO No. 14-2021 could be relevant particularly for foreign investors looking to invest in the Philippines, in that it provides guidance as to how relief can be claimed—a common consideration when making the business case for a project or investment. The guidance 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.
Read a May 2021 report prepared by the KPMG member firm in the Philippines
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