THE Bureau of Internal Revenue (BIR) recently issued Revenue Memorandum Circular 72-2015, circularizing the agreement between the Government of the Republic of the Philippines and the Government of the State of Qatar for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, which has entered into force on May 19, 2015.
Although the said tax treaty was signed between the governments of the two countries way back in December 2008, it was only ratified by the President in 2011 and concurred in by the Senate in 2013. Based on the treaty, it shall have effect in respect of taxes covered by it, for any taxable period beginning on or after the first day of January next following that year in which the treaty enters into force. Thus, the benefits under the treaty will apply on taxes covered by the treaty beginning in January 2016 and thereafter.
Similar to the already existing tax treaties that the Philippines has with other countries, the new treaty contains provisions on the tax treatments of dividends, interest, royalties and capital gains, among others.
Insofar as dividend is concerned, the general rule under our domestic law is that dividends due to a non-resident foreign corporation shall be subject to the 30-percent final tax, or in case the tax sparing provision applies, the final tax rate is 15 percent. With respect to individuals, the final tax rate is 20 percent if the recipient is an alien individual engaged in trade or business in the Philippines, or 25 percent if the recipient of the dividend is not engaged in trade or business in the Philippines. With the entry into force of the treaty with Qatar, these tax rates are reduced, or shall not exceed 10 percent, if the beneficial owner who is a resident of Qatar is a company (excluding partnerships), which holds directly at least 10 percent of the capital of domestic company paying the dividends. The rate is 15 percent in all other cases.
With respect to interests, the tax treaty limits the tax to be charged to 10 percent of the gross amount of the interest. This is definitely lower than the 20-percent tax applicable to non-resident foreign corporations, the 20-percent tax applicable to alien individuals engaged in trade or business in the Philippines, and the 25-percent tax applicable to alien individuals not engaged in trade or business in the Philippines, as provided in our local tax laws.
As to royalties, the tax so charged shall not exceed 15 percent of the gross amount of the royalties based on the new treaty. Unlike some of the already existing tax treaties, the article on royalties of the Philippines-Qatar tax treaty does not contain a “most-favored nation” clause. This clause simply means that the tax to be imposed may follow the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third state. Nonetheless, the 15-percent tax is still noticeably lower than the usual tax rates provided under the domestic laws, which require the imposition of tax at the rate of 30 percent on royalties payable to non-resident foreign corporations.
These are just some of the preferential tax rates that can be availed of under the Philippines-Qatar tax treaty. Like in the case of other tax treaties though, these preferential tax rates may not apply if the beneficial owner of the income, being a resident of Qatar, carries on business in the Philippines through a permanent establishment, or performs in the country independent personal services from a fixed base situated here, and the income payment is effectively connected with such permanent establishment or fixed base. In such case, a different rule may apply.
Last, the circular provides that a Qatari resident income earner, who invokes the Philippines-Qatar double-taxation agreement, or an authorized representative, should file with the International Tax Affairs Division of the BIR an application for tax-treaty relief pursuant to Revenue Memorandum Order 72-2010.
****
The author is a senior associate of Du-Baladad and Associates Law Offices (BDB Law), a member-firm of World Tax Services (WTS) Alliance.
The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at julie.aranda@bdblaw.com.ph or call 403-2001 local 312.