By John Regalado & Tanya Beatriz Y. Tan, SyCip Salazar Hernandez & Gatmaitan, Philippines
On March 31, the Philippine Bureau of Internal Revenue issued Revenue Memorandum Order No. 014-21, streamlining the procedures for access to Philippine tax treaty benefits.
In the Philippines, the time period for filing an application for tax treaty benefits has been an issue between different government agencies.
While the Philippine tax bureau previously limited the period to file an application for tax treaty relief to fifteen days before each transaction, the Philippines’ highest court has decreed that the outright denial of a tax treaty relief for failure to strictly comply with the prescribed period is not in harmony with tax treaty objectives.
According to the High Court, an application merely confirms a taxpayer’s entitlement to tax treaty benefits and cannot unduly divest a taxpayer of the right to avail of such benefits. To comply with the High Court’s interpretation, the tax bureau updated its guidelines for the processing of tax treaty relief applications.
Moreover, the tax bureau acknowledges the need to provide taxpayers certainty regarding their tax treatment by expediting the processing of their applications, notwithstanding constraints on the volume of work, the limited number of personnel, and the requirement for a thorough evaluation.
Scope of application
The issuance covers Philippine-sourced income derived by nonresident taxpayers from the Philippines that are entitled to relief from double taxation under a relevant tax treaty.
Other than streamlining the procedures for availing tax treaty benefits, the revenue memorandum order changes the manner of confirming entitlement to tax treaty benefits, addresses pending applications for income earned in prior years, and prescribes penalties for the late filing of the relevant applications.
Administrative guidelines
The Philippine tax bureau requires nonresident taxpayers to submit an application form citing the relevant provision of the tax treaty and a tax residency certificate with the withholding agent or income payor prior to the first income payment.
The withholding agent or income payor may rely on these documents to determine whether to apply a reduced rate of, or exemption from, withholding tax on income derived by a nonresident taxpayer from sources within the Philippines.
Withholding agents or income payors are designated by Philippine law as agents of the nonresident taxpayers and are obligated to withhold income tax payments due to the nonresident taxpayers and remit these to the Philippine government.
In case the withholding agent applies a preferential tax treaty rate, the withholding agent is required to file with the tax bureau a request for confirmation of the propriety of the withholding tax rate. The request may be filed at any time after the payment of withholding tax but no later than the last day of the fourth month following the close of each taxable year.
In case the withholding agent applies the regular tax rate, the nonresident taxpayer may seek tax treaty relief by filing an application with the tax bureau.
The application may be filed at any time after the receipt of the income subjected to tax. The application must be accompanied by supporting documents to prove entitlement to tax treaty relief depending on the type of income involved.
Documents executed in a foreign country must either be authenticated by the Philippine embassy or apostilled by the relevant government agency at the place of execution. The application must be processed within four months from the submission of all supporting documents or as soon as practicable.
The tax bureau will issue a certificate resolving the request for confirmation or application for tax treaty relief. If the tax bureau grants the application for tax treaty relief, the nonresident may apply for a refund of any excess tax withheld within two years from the date of payment.
If the tax bureau rules that it was improper to apply the preferential tax rate or denies the tax treaty relief application, the withholding agent should pay the deficiency tax and penalties on behalf of the taxpayer. The withholding agent or nonresident taxpayer may however, appeal the adverse ruling within thirty days from the receipt of the ruling.
Treatment of long-term contracts
The revenue memorandum order generally mandates only one request or application for each transaction.
However, for long-term contracts with more than one year of effectivity, the withholding agent or nonresident taxpayer must update the tax bureau annually by filing an updated application form, a newly issued tax residency certificate, if any, and other relevant documents not later than the last day of the fourth month following the close of each taxable year.
Evaluation of pending applications
For taxpayers with pending applications for income earned in the year 2020 or earlier, the revenue memorandum order limits the period to submit additional documents to either three months from the receipt of a notice to submit additional documents or March 31, 2021, whichever is later.
The failure to substantiate entitlement to treaty benefits would merit the automatic denial of the application for tax treaty relief.
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John Regalado is a Partner at SyCip Salazar Hernandez & Gatmaitan, Philippines.
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Tanya Beatriz Y. Tan is a Legal Assistant at SyCip Salazar Hernandez & Gatmaitan, Philippines.
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