Streamlining the Procedures and Documents for the Availment of Treaty Benefits

On 31 March 2021, the Philippines’ Bureau of Internal Revenue (“BIR”) issued Revenue Memorandum Order (“RMO”) No. 14-21 updating the administrative guidelines and procedures in the availment of tax treaty relief.

The RMO addresses issues related to tax treaty relief applications (“TTRA”) in light of the pronouncement of the Supreme Court in the 2013 case of Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue.

Reconciling the pronouncement in Deutsche that outright denial of tax treaty relief for failure to comply with the prescribed period for filing is not in harmony with benefits granted under the tax treaties, and the BIR interpretation that the Court in Deutsche did not rule on the propriety of filing TTRAs, the RMO clarified that the BIR “may still require the filing of TTRAs to confirm the entitlement thereto but in a manner that would not unduly divest the taxpayers from availing the intended treaty benefits.”

The streamlined manner for availment of tax treaty relief is set forth in the RMO and summarized below.

• Nonresident taxpayers intending to avail of treaty benefits must submit to the withholding agent the prescribed application form (referring to the relevant provision of the tax treaty sought to be applied) and a Tax Residency Certificate (“TRC”) duly issued by the foreign tax authority;
• The withholding agent may rely on such application form and TRC to decide whether to apply the preferential treaty rate or exemption from withholding tax at source on the income derived by the nonresident or to apply the regular rates under the Tax Code;
• There is a divergence in the procedure (and the filing party), depending on the decision of the withholding agent:
  • Where the treaty exemption or preferential rates are applied, the withholding agent must file with the BIR International Tax Affairs Division (“ITAD”) a request for confirmation on the propriety of the withholding tax rates applied. The withholding agent must file the request for confirmation at any time after the payment of the withholding tax but no later than the last day of the fourth month following the close of each taxable year;
  • Where the tax rates under the Tax Code (and not the treaty rates) are applied, the nonresident must file a TTRA with the ITAD. The nonresident may, at any time after the receipt of income, file a TTRA to prove its entitlement to treaty benefits.
  However, in either case, the required supporting documents must be submitted. The RMO updates the list of supporting documents and also indicates the discontinuance of certain forms. Still, all documents executed in a foreign country must be authenticated by the Philippine embassy or apostilled.
• The process for confirming entitlement to treaty benefits is streamlined such that:
  • Where the request is granted, the BIR will issue, in lieu of the usual BIR Ruling and Compliance Check Report, a certification confirming entitlement to the treaty benefit or confirming the correctness of the withholding tax rates applied.
  • In cases of denial or rulings of first impression, a BIR ruling containing the factual and legal bases that led to the conclusion will be issued.
• Generally, one TTRA or request for confirmation shall be filed for each transaction except that for long-term contracts, i.e. those which are effective for more than a year, an annual updating must be made until the termination of the contract to ensure the proper rate is applied until the end of the contract. For this purpose, updated application forms and new TRCs must be submitted, along with other relevant documents, not later than the last day of the fourth month following the close of each taxable year.
• Taxpayers with pending TTRAs for income earned in 2020 and prior years are given three (3) months from receipt of the pertinent notice to submit additional documents, or from effectivity of the RMO, whichever is later, to submit lacking documents. The offshoot of failure to submit requested documents is automatic denial of the TTRA for failure to substantiate entitlement to treaty benefits.
• If the income of the nonresident taxpayer was subjected to regular rates, the nonresident may subsequently file a claim for refund of the difference between the amount of withholding tax actually paid and the amount of tax that should have been paid under the treaty. The claim for refund may be filed independently of, or simultaneously with, the TTRA.
• The RMO covers all items of income derived by nonresident taxpayers from Philippine sources that are entitled to relief from double taxation.