The Bureau of Internal Revenue issued Revenue Memorandum Order 14-2021 (RMO 14-21) purportedly to streamline the procedures and documents in the availment of tax treaty benefits. This new RMO provides new guidelines and procedures in the availment of tax treaty reliefs, effectively repealing, superseding, and modifying the prior guidelines and procedures provided in RMO 30-2002, RMO 72-2010 (Guidelines on the Processing of Tax Treaty Relief Applications Pursuant to Existing Philippine Tax Treaties) and RMO 8-2017 (Procedure for Claiming Tax Treaty Benefits for Dividend, Interest and Royalty Income).
One significant change introduced by the new RMO is the discontinuance of the submission of Certificate of Residence for Treaty Relief Form to avail of the preferential rates for dividends, interest and royalties. These types of income payments, together with other types of income paid to non-residents, which are entitled to tax exemptions or reduced tax rates based on applicable tax treaties, are now required to comply with this new RMO.
The new RMO imposes on the nonresident taxpayer deriving income from sources within the Philippines and who intends to apply the reduced rates or tax exemptions available under tax treaties to accomplish the prescribed Application Form for Treaty Purposes (BIR Form 1901) and secure Tax Residency Certificate (TRC) from the tax authority of its country of residence. These documents must be submitted to its income payor or withholding agent prior to the payment of income for the first time. In case of failure of the non-resident to provide the said documents, the income payor may disregard the treaty rate and apply the regular rates prescribed under the domestic tax law.
Apparently, the submission of the accomplished BIR Form 1901 and TRC to the withholding agent does not oblige the latter to apply the tax rates based on the tax treaty. The withholding agent may use the income tax/final withholding tax rate provided in the treaty or still apply the rate based on the Tax Code.
The rate used by the income payor will determine the next step for the availment of the tax exemption or reduced treaty rate. In case the treaty rate is applied, the withholding agent shall file with the International Tax Affairs Division of the BIR a request for confirmation on the propriety of the withholding tax rates applied on the income payment made. This shall be filed by the withholding agent 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. On the other hand, if the regular rate is imposed by the withholding agent, it shall be the responsibility of the nonresident recipient of the income to file an application for tax treaty relief with ITAD. This may be done any time after the receipt of income. And whether a request for confirmation is filed by the withholding agent or a TTRA is filed by the income recipient, the filing shall be supported by documents prescribed by the new RMO.
Incidentally, in addition to the modification of the procedures, new documentary requirements had also been added and some of the previously required documents were modified. Let me reserve my comment on these modified procedures and documentary requirements for the future articles in this column. In the meantime, let’s review whether there should even be a need for confirmation or application for TTRA in the first place.
As stated in the background for the issuance of this new RMO, the availment of treaty benefits has always been an issue, and added that it had been subjected to varying interpretations after the pronouncement made by the Supreme Court in the Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue (GR 188550, August 19, 2013—the “Deutsche Case”). Indeed, the requirement for the filing of a TTRA with the tax authority before one can apply the exemptions or preferential tax rates based on tax treaties had always been an issue. I, however, don’t agree that the Deutsche Case resulted in more varying interpretations. It had in fact settled the issue.
It is true that the case did not categorically state that a tax treaty relief application is not required for the enjoyment of tax treaty benefits. It did, however, rule against the requirement at that time for the filing of an application before the transaction. Hence, a prior application is not a requisite for the enjoyment of treaty benefits.
As to whether an application may be required while the transaction is ongoing or after its completion, there was no specific pronouncement to that effect. The facts of that case showed that there was a subsequent application by the taxpayer. Yet there was no declaration by the Court that the subsequent application was needed for the entitlement to the treaty benefit. Had there been a statement to that effect, then, rightfully, the implication would be that an application is required, but which could be done at any stage of the transaction.
In my view, the more important message in the Deutsche Case is the declaration that the outright denial of tax treaty relief is not in harmony with the objectives of the contracting state to ensure that the benefit granted under the treaties is enjoyed by the person entitled to it. It is the requirement itself that the Court ruled as not necessary for one to enjoy the benefit, as the treaties do not provide such requirement. This must be read in relation to the Court’s statement that the tax authority must not impose additional requirements that would negate the availment of the reliefs provided for under international agreements. Certainly, any failure to file TTRA or a confirmation of an availment already made, before, during, or after the transaction does not violate a requirement in tax treaties.
And to the view that there had been varying interpretations after the Deutsche Case, perhaps referral to the Courts’ subsequent applications of the case is noteworthy. Rulings favored the taxpayers, emphasizing on the fact that “it is an imposition that is not found at all in the applicable tax treaties.” Is the subsequent confirmation or application or subsequent application for TTRA found in the treaties?
The author is the Managing Partner of Du-Baladad and Associates Law Offices (BDB Law), a member-firm of WTS Global.
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 [email protected] or call 8403-2001 loc 310.