BIR Clarifies the Procedures and Documents for the Availment of Tax Treaty Benefits

On 15 June 2021, the Bureau of Internal Revenue (“BIR”) issued Revenue Memorandum Circular (“RMC”) No. 77-2021 which clarifies certain provisions of Revenue Memorandum Order (“RMO”) No. 14-2021 on streamlining procedures and documents for the availment of tax treaty benefits. 

The notable matters clarified by the BIR in RMC 77-2021 are as follows:

• The benefit of a tax treaty does not extend to a taxpayer who fails to prove his/her/its residency in either or both contracting states. Since the best proof of residency is the Tax Residency Certificate (“TRC”) duly issued by the competent authority of the treaty partner, failure to submit the same would result in the denial of the non-resident’s claim.

• One original and authenticated TRC shall be submitted to each income payor per year. In the alternative, a certified true copy of the original may be submitted to other payors of income if the original copy is no longer available, with a notation as to whom the original copy was previously submitted.

• Only one consolidated request for confirmation per non-resident income recipient, regardless of the number and type of income payments made during the year, shall be filed by the withholding agent.

• Annual updating is only mandatory in the case of long-term contract of services where the existence of a permanent establishment in the Philippines is dependent on time threshold. For contract of services, the Certificate of Entitlement to Treaty Benefit (“COE”) shall be limited to a particular period of engagement.

• Annual updating is not mandatory for long-term contracts involving the payment of interests and royalties and other types of income where the condition for entitlement to treaty benefits is not dependent on time threshold. In this case, the BIR will issue a one-time certification that is presumably valid for the whole duration of the contract so long as there is no relevant and significant change in the facts or circumstances upon which the ruling was based.

• For long-term contracts, it shall be the duty of the withholding agent to ensure that the non-resident continues to be a resident of the same country for the whole duration of the contract, and for this purpose, it may require the submission of TRC at the beginning of each year.

• In case the non-resident income recipient has a permanent establishment in the Philippines, the Audited Financial Statement (“AFS”) of such permanent establishment must be submitted to prove that the income payment is not effectively connected with the permanent establishment. If not yet available on the date of filing, a Sworn Certification must be issued by the permanent establishment in lieu of the AFS.

• For controlled transactions or transactions between related parties relating to interest payments, the best proof of arm’s length transfer prices is the Transfer Pricing Documentation (“TPD”) of the non-resident creditor. In case the TPD is not available, any equivalent study may be submitted.

• For income payments in 2020 and prior years subjected to the treaty rates, but no Certificate of Residence for Tax Treaty Relief (“CORTT”) Form was filed, the withholding agent has until the last working day of 2021 to file a request for confirmation with complete documentary requirements. Otherwise, the penalty provisions under the Tax Code shall be imposed.

• There will be no automatic denial for failure to file within the prescribed period. Denials will purely be based on the merits of the case. However, the penalty for late filing shall be imposed in accordance with Sec. 13 of RMO No. 14-2021.

• Applications with incomplete documents will no longer be accepted. In case an application with incomplete documents was inadvertently accepted, the filer shall be duly notified of the result of evaluation and the docket shall be returned immediately to said filer.