Deciphering the questions on the use of the benefits of the tax treaty


Given the recent changes in the tax landscape and the Philippines’ vast network of bilateral tax treaties for transactions with foreign entities, it has become evident that one of the government’s goals is to improve efficiency and services to taxpayers. In fact, on June 25, the Bureau of Internal Revenue (BIR) issued Tax Circular (RMC) No. 77-2021, which clarifies the revised guidelines and procedures for enjoying the benefits of the tax treaty provided by the Ordinance on Tax Memorandum (RMO) No. 14-2021.

RMO # 14-2021 previously provided that a Confirmation Request (RFC) or Tax Treaty Relief Request (TTRA) would apply to all income earned by non-residents from Philippine sources that may have right to double taxation relief under relevant tax treaties. Taxpayers should stop submitting the Certificate of Residence for Tax Treaty Relief (CORTT) form for dividends, interest, and royalties effective with the release of RMO # 14-2021 on March 31. These revised guidelines replaced those published in 2017 (RMO 8-2017), 2010 (RMO 72-2010) and 2002 (RMO 20-2001).

Who can benefit from the advantages of the convention?

Only natural or legal persons residing in one or both Contracting States can benefit from the advantages of the convention. To establish the fact of residing in a Contracting State, the recipient of non-resident income must present a tax residence certificate (TRC) duly issued by the tax administration of the country of residence. The best proof of residence is the TRC duly issued by the competent authority of the treaty partner. Failure to submit the same would result in the rejection of the non-resident’s application.

Decisions regarding the application and interpretation of tax treaties should emanate from the International Tax Affairs Division (ITAD) of the BIR. Therefore, the RFC of the income payer and the TTRA of the non-resident or an authorized representative with a special power of attorney must be filed with the ITAD.

Applications with incomplete documents will no longer be accepted. In the event that an application with incomplete documents has been inadvertently accepted, the applicant should be duly informed of the outcome of the assessment and the application fee should be refunded immediately.

RMC No. 77-2021 specifies that the non-resident taxpayer must submit to the income payer his TRC and the appropriate BIR form No. 0901 before payment of his income if he intends to avail himself of the benefits of the tax. tax Convention. Otherwise, the income payer as withholding agent must submit income payments to the normal tax rates imposed by the Tax Code, as amended.

The withholding agent / revenue payer must file an RFC with ITAD for both cases:

a. When the conventional rates have been applied by the agent responsible for withholding from the income received by the non-resident; and

b. When the non-resident’s income was not subject to tax in the Philippines.

Non-residents are not required to resubmit a TRC to the income payer every time the former earns income. Only one original and authenticated TRC must be submitted each year. Alternatively, a certified true copy of the original may be submitted to other payers of income, provided that a statement indicating to whom the original document was previously submitted is reflected.

The same rule also applies to proof of establishment or incorporation, certificate of non-registration or license to do business in the Philippines duly issued by the SEC (Securities and Exchange Commission) and certificate of registration. / business presence duly issued by the ministry. of Commerce and Industry (DTI).

The revised prescribed dates in which to file the RFC, with full documentary requirements, are as follows:

a. Capital gains: Any time after the transaction but no later than the last day of the fourth month following the close of the taxable year when the income is paid or when the transaction is consumed.

b. Other types of income: at any time after the end of the tax year but no later than the last day of the fourth month following the end of that tax year when the income is paid or becomes payable, or when the expenditure / the asset is accumulated or recorded in the books, whichever occurs first.

Only one consolidated RFC per non-resident income recipient, regardless of the number and type of income payments made during the year, must be filed. The RMC further clarified that there would be no automatic denial in the event of failure to file the RFC or TTRA within the prescribed time limit. However, a late filing penalty will be imposed.

On the other hand, an TTRA must be filed by the non-resident taxpayer or his authorized representative when a conventional rate is not applied and the regular rates have been imposed on income. A request for reimbursement at any time after payment of the withholding tax if the standard rate of the General Tax Code has been applied must also be filed.

The annual update is not necessary for long-term contracts involving the payment of interest and royalties and other types of income where the eligibility condition for the benefits of the agreement does not depend on the time threshold. In the case of a long-term service contract where the existence of a permanent establishment (PE) in the Philippines is dependent on a time threshold, the annual update is mandatory.

The withholding agent should ensure that the non-resident continues to be a resident of the same country for the duration of the contract by requiring the non-resident to have an updated TRC. In the event of an audit, the withholding officer is required to prove that the facts and circumstances have not changed at any time after the issuance of the Certificate of Entitlement (CoE).

A withholding agent can still file an RFC until the last business day of that year for the non-resident taxpayer’s income in 2020 and transactions made in previous years that were subject to the treaty rates but without request. TTRA or CORTT form. Failure to file within the prescribed period results in administrative penalties under Articles 250 and 255 of the General Tax Code. In addition, a penalty of 1000 P for failure to file a CORTT form for dividends, interest and royalties paid after the entry into force of RMO 8-2017 until December 31, 2020 must be imposed.

All taxpayers with pending TTRAs prior to the entry into force of RMO 14-2021 have three months from receipt of a “Final Notice of Submission of Additional Documents” to comply; otherwise, the TTRAs are deemed to be automatically refused. Unlike RMO 14 2021, RMC n ° 77-2021 provides that those who have been informed that their application has been archived will no longer receive a final notification. However, they are required to submit the required documents indicated in the previous notices within four months of the entry into force of the new RMO.

Transfer pricing documentation (TPD) is considered the best evidence of arm’s length transfer pricing for interest charged on a loan or related party receivables. In the event that the full TPD is not available, the non-resident can prove, through its transfer pricing policy for intercompany loans or any equivalent transfer pricing study, that the interest rate imposed on the loan or receivable is at arm’s length.

For capital gains, an audited interim financial statement should be used to calculate the real estate interest of the issuing national company at the time of the transaction. Alternatively, the following may be submitted: 1) an unverified provisional FS and 2) an expiration schedule from the date of transfer or disposal of the asset.

In meritorious cases, the non-resident or withholding officer may be granted an extension to submit the required documents, but in no case may it exceed 30 days.

If the RFC or TTRA is approved, the BIR will issue a CoE instead of the usual BIR decision. The CoE will always contain the material facts of the case and a decision confirming the non-resident’s right to the benefits of the convention. However, an RFC must be re-filed by the Withholding Officer if there are material changes in the facts or circumstances on which the previous decision was based in the following year.

With the issuance of RMC n ° 77-2021, it is important that taxpayers continually familiarize themselves with new developments and replaced policies and guidelines. A sufficient understanding of the application of the provisions of tax treaties certainly offers an advantage in order to benefit from preferential tax rates on income payments.

Let’s Talk Tax is a weekly column by P&A Grant Thornton that aims to keep the public informed about various tax developments. This article is not intended to be a substitute for competent professional advice.

Paul Vinces C. Leorna is a senior manager of the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.

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