Tax treaty relief application guidelines

The BIR recently issued Revenue Memorandum Order (RMO) No. 72-2010 streamlining the processing of Tax Treaty Relief Applications (TTRA) and prescribing its revised documentary requirements.

Under this RMO, TTRA should be filed before the occurrence of the first taxable event with the International Tax Affairs Division (ITAD) of the Bureau of Internal Revenue (BIR) National Office. Failure to file within the prescribed period shall have the effect of disqualifying the TTRA under this RMO.  In the absence of TTRA, payment to non-residents will be subject to regular corporate income tax at 30%.

Please click the link below to access the copy of the RMO.

ftp://ftp.bir.gov.ph/webadmin1/pdf/52924RMO 72-2010.pdf

Sometime in 2008, I wrote an article regarding the proposed rules on tax treaty relief application. Below is the copy of the article for your reference.

 

Proposed new rules on tax treaty relief application

by:  Arnold P. Supilanas
(Published in BusinessWorld on October 28, 2008)

A number of conventions or agreements for the avoidance of double taxation have been concluded by the Philippine government and the governments of other countries. Commonly known as tax treaties, these conventions provide rules and guidelines on the taxation of income derived by a resident of a contracting state from another contracting state.

Subject to certain conditions, such income may be entitled to some tax relief, such as exemption from income tax or lower/preferential tax rate. Since the availment of tax treaty relief is a form of tax exemption, such exemption cannot be granted if the entitlement remains unproven and unsubstantiated. This rule is aligned with the basic tenet in taxation that tax exemptions shall be construed strictly against the taxpayer, and liberally in favor of the government.

The relevant issuance in the availment of the tax treaty relief is Revenue Memorandum Order (RMO) No. 1-2000. Under this Order, any availment of the tax treaty provisions shall be preceded by an application for treaty relief with the International Tax Affairs Division (ITAD). The said application must be filed at least 15 days before the occurrence of the transaction.  This requirement has been confirmed by the Court of Tax Appeals in a number of decisions.

From the foregoing premises, it appears that securing a ruling from the ITAD of the Bureau of Internal Revenue (BIR) is a mandatory requirement before one can avail of the tax treaty benefits; failure to secure a ruling may invalidate the treaty relief availed of in case of an audit by the tax authority.

A new draft Revenue Memorandum Circular (RMC) prescribing the guidelines for the processing of applications for relief from double taxation pursuant to existing tax treaties has just been exposed to the public for comment. The draft includes a list of documentations required to support claims for application for relief from double taxation.

There is also a new twist in the draft—the availment of preferential tax rates and exemptions provided under Philippine tax treaties need not be preceded by an application for tax treaty relief. In other words, tax exemptions and preferential tax rates provided under the tax treaties may be invoked outright without the need of securing a ruling from the BIR. However, if it is later revealed to the tax authority that the facts surrounding the subject transaction do not warrant the application of the preferential tax rate or exemption from income tax under tax treaties, the correct amount of taxes and appropriate penalties may be collected from the concerned taxpayers. Nonetheless, it is still to the best interest of both the taxpayer and the BIR that a tax treaty relief is secured to avoid any erroneous interpretation and/or application of the treaty provisions.
Another significant feature of the draft RMC is the required period within which to file the application for tax treaty relief—i.e., within 30 days from the occurrence of the first taxable event, complete with all the documentary requirements. The phrase “first taxable event” refers to the very first time or the only time when the payor of the dividend, interest, or royalty is required to withhold the income tax thereon, and in the case of capital gains, the date when the deed of sale or deed transferring the subject shares of stock is executed.  In the absence of complete documents, the request may be treated as “No Ruling Area”.

A significant improvement in the draft is the provision that requires the ruling to be available for release after 45 working days from the date of the receipt of the application for tax treaty relief, of which period the ITAD has 30 working days to process and evaluate the application while the legal service has 10 working days.

The exposure draft is a welcome initiative. It is hoped that this would simplify or streamline the processing of tax treaty relief applications. If this proposed circular will b e finalized and issued, taxpayers will have clear guidelines on how to avail of the tax treaty relief. This also simplifies the processing of tax treaty relief applications, identifies the documents that should accompany the applications for tax treaty relief, and provides for a faster and more efficient processing of applications.