By: Zoe Bryce Amac on April 15, 2021

Tax conventions or treaties are mechanisms imposed by a state in order to minimize the effects of double taxation. They provide double taxation reliefs to taxpayers in the form of tax exemptions or preferential tax rates.

Tax treaties are part of the law of the land. In the case of Deutsche Bank AG Manila Branch vs Commissioner of Internal Revenue (GR 188550, August 19, 2013), the Supreme Court held that an application for the availment of tax treaty relief should not operate to divest entitlement to the relief as it would constitute a violation of the state’s duty to good faith in complying with a tax treaty in good faith. This is pursuant to the time-honored international law principle of pacta sunt servanda that demands the performance in good faith of treaty obligations on the part of the states that enter into the agreement.

Thus, the Supreme Court held that an application for tax treaty relief filed with the Bureau of Internal Revenue (BIR) should merely operate to confirm the entitlement of the taxpayer to the relief and cannot totally deprive those who are entitled to the benefit of a treaty for failure to strictly comply with an administrative issuance requiring prior application for tax treaty relief.

Recently, the BIR issued Revenue Memorandum Order (RMO) 14-2021. The RMO was issued to streamline the procedures and documents in availing treaty benefits and relief/s and to observe the Ease of Doing Business Act or Republic Act No. 11032.

RMO 14-2021 repeals, amends and modifies all previous issuances involving applications or grants of reliefs from double taxation under relevant tax treaties.

What to file

Pursuant to RMO 14-2021, the local withholding agent/income payor may rely on the following: BIR Form 1901 or Application Form for Tax Treaty Purposes (application form); 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 the nonresident taxpayer from sources within the Philippines.

Under the previous process (covered by RMOs 72-2010 and 8-2017), if the income earned by the non-resident taxpayer pertains to royalties, interest and dividends, the nonresident taxpayer is required to submit a Certificate of Residence for Treaty Relief (CORTT) form to the local withholding agent/income payor before the income is paid or credited. Subsequently, the withholding agent/income payor shall submit the CORTT to the BIR within 30 days after payment of withholding taxes due.

RMO 14-2021 no longer requires the filing of the CORTT form. Instead, it requires that if the tax treaty rates have been applied on the income earned by the non-resident-taxpayer, the withholding agent/income payor shall file with the International Tax Affairs Division (ITAD) of the BIR a request for confirmation on the propriety of the tax rates applied. The request for confirmation shall be filed at any time after the payment of withholding tax but shall in no case be later than the last day of the fourth month following the close of each taxable year of the withholding agent.

Tax treaty relief application

If the regular rates have been imposed on said income, the nonresident taxpayer shall file a tax treaty relief application (TTRA) with the ITAD to prove its entitlement to tax treaty benefits. The filing of TTRA, in the event the non-resident taxpayer is required to do so (when regular tax rates have been imposed on income sourced within the Philippines instead of the tax treaty rates or benefits), shall be filed by the non-resident taxpayer at any time after the receipt of income.

Under RMO 14-2021, if the BIR determines that the withholding tax rate applied is lower than the rate that should have been applied on an item of income based on the tax treaty applicable, or that the nonresident taxpayer is not entitled to tax treaty benefits, the BIR will issue a ruling denying the request for confirmation or TTRA. In the event of such denial, the non-resident taxpayer shall be liable to pay deficiency tax and penalties.

In case the withholding tax rate applied for in the TTRA is proper, the BIR will issue a certificate confirming the entitlement of the non-resident taxpayer to tax treaty benefits. If the BIR finds that a higher tax rate was imposed, the nonresident taxpayer may apply for a refund of the excess withholding tax paid.

Both the old and new rules provide that the withholding agent/income payoror the non-resident taxpayer, as the case may be, can appeal adverse decision to the Department of Finance within 30 days from receipt of the decision.

With these new rules, we hope that the BIR will accomplish one of its goals which is to expedite the processing of applications of taxpayers availing the tax treaty benefits.

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Zoe Bryce Amac is a legal assistant of Mata-Perez, Tamayo & Francisco (MTF Counsel). This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at info@mtfcounsel.com or visit MTF website at www.mtfcounsel.com.