Tax treaty relief availment simplified
Another income tax filing season is over and the post-filing period is an opportune time to do housekeeping on accounting documents and records. Also, this gives us breathing room for updates on the latest tax issuances of the Bureau of Internal Revenue (BIR). One issuance that caught my attention recently is the BIR’s Revenue Memorandum Order No. (RMO) 8-2017 which will take effect on June 26, 2017. This amended the previous RMO (72-2010), which prescribes the guidelines and processes for tax treaty relief applications (TTRA). Compliance with the previous RMO was challenging to most taxpayers as it requires filing the TTRA and supporting documents with the BIR before the transaction (i.e. first taxable event). Under the RMO, failure to file the TTRA prevents taxpayers from claiming relief under the tax treaty.
However, the mandatory filing of the TTRA was reversed by the Supreme Court (SC) in 2013 when it upheld the automatic application of tax treaty incentives in the case of Deutsche Bank AG Manila Branch vs. CIR (G.R. 188550 dated Aug. 19, 2013). The high court ruled that the TTRA should merely confirm the privilege of the taxpayer to the relief and should not be a requirement for the enjoyment of such entitlement.
The SC decision paved the way for the issuance of RMO 8-2017 which provides new procedures for outright availment of tax treaty relief but only insofar as dividends, interest and royalty payments to non-residents are concerned. Therefore, for other types of income, such as capital gains and business profits (i.e., income from sale of goods and services), taxpayers still need to file an application with the BIR and obtain a ruling as prescribed under RMO 72-2010, to be entitled to treaty relief.
One new requirement introduced in the new RMO is the filing of a Certificate of Residence for Tax Treaty Relief (CORTT) Form with the BIR. This newly created BIR Form replaces the old TTRA forms (BIR Form No. 0901) and is composed of two parts. The first part requires information on the applicable tax treaty, the income recipient or the beneficial owner of the income and the certification of the competent authority or authorized tax office of the concerned treaty partner. As such, the CORTT Form shall serve as proof of residency for the non-resident. The second part, on the other hand, requires information on the withholding agent or the income payor, the type of income earned in the Philippines for which relief is being claimed, details of the withholding tax, and the declarations of both the income recipient and the withholding agent on the correctness and validity of the transaction.
Below are the basic guidelines on the new TTRA:
1. The mandatory TTRA shall no longer be filed with the International Tax Affairs Division (ITAD). Instead, preferential treaty rates or exemptions for dividends, interests and royalties shall be applied and used outright by the withholding agents upon submission of a CORTT Form by the nonresident.
2. Non-residents are allowed to use the prescribed certificate of residency of their country of residence which they should then attach to the CORTT Form. However, they are still required to accomplish Part I of the CORTT Form for monitoring purposes.
3. For dividend income purposes, the CORTT Form shall be valid for two years from date of issuance. However, if a prescribed certificate of residency is used, the date of validity of the latter document will prevail over the two-year period given. For interest and royalty income purposes, the CORTT Form shall be valid per contract.
4. Failure to submit a CORTT Form to the withholding agent/income payor would mean that the non-resident is not claiming any tax treaty relief and therefore such income will be subject to the normal rates provided under the Tax Code.
5. The withholding agent/income payor must submit the accomplished CORTT Form (Parts I and II and with attached prescribed certificate of residency if applicable) to ITAD and Revenue District Office (RDO) No. 39 within 30 days after payment of the withholding taxes due on the covered income of the nonresident. The withholding agent shall submit an updated Part II of the CORTT Form within 30 days after payment of withholding taxes due: (a) If the CORTT Form filed with ITAD and RDO No. 39 is used for another dividend payment within its prescribed period of validity; and (b) In case of staggered payment of interest and royalty income.
Pertinent information from the CORTT Form and from BIR Forms 1601-F and 1604-CF shall be accumulated and monitored by ITAD and RDO No. 39. Such data shall be used for conducting risk analysis, formulating policies, developing the country’s treaty negotiating positions and generating management reports. Compliance check and post reporting validation on withholding tax obligations and confirmation of appropriateness of availment of treaty benefits shall be part of the BIR’s regular audit investigations conducted by the RDO having jurisdiction over the withholding agent.
For those non-residents who have filed TTRAs with the BIR for dividend, interest and royalty income prior to this new RMO, they will be allowed to use the tax treaty rates invoked subject to a compliance check. Similarly, ITAD will use the submitted information in creating a database for treaty relief availment monitoring purposes. If the requisite certificate of residency is not among the submitted documents, the withholding agent will be requested to submit the same.
Failure to supply accurate/complete information in the CORTT Form and BIR Forms 1601-F and 1604-CF will render the non-resident and withholding agent noncompliant, which shall be grounds for the denial of treaty relief and for the disallowance of the related expense of the withholding agent. Further, penalties for noncompliance include P1,000 for each violation pursuant to Section 250 of the Tax Code, provided that the aggregate amount should not exceed P25,000 in a calendar year.
Overall, this new RMO is a testament that the government is serious in streamlining the processes in administrative filings and applications, which ultimately translates to achieving efficiency in our current system and cost savings for various businesses. While it is true that a lot of work still needs to be done, we should see this as a positive sign that the government is willing to partner with local and foreign investors in meeting their business objectives.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.
Joel Roy C. Navarro is a director at the tax services department of Isla Lipana & Co., the Philippine member firm of the PwC network.