Tax treaty relief made easy

(First of two parts)

Claims for preferential tax treatment under applicable tax treaties have long been a challenge for non-resident income earners, income payors or withholding agents, as well as the Bureau of Internal Revenue (BIR). This is particularly significant considering that the Philippines has a wide and expanding network of effective tax treaties. Notably, there are 41 such treaties as of Jan. 1 2017.

On March 28, 2017, BIR Commissioner Caesar R. Dulay issued Revenue Memorandum Order (RMO) No. 8-2017 modifying the procedure for how to avail of tax treaty benefits on payments of dividend, interest, and royalty to nonresidents. The revised rules amending RMO 72-2010 aim to simplify the tax treaty relief process for taxpayers consistent with the BIR’s efforts to improve the efficient administration of Philippine tax treaties. RMO 8- 2017 takes effect on June 26, 2017 or 90 days from its date of issuance.

A significant change under RMO 8-2017 is that non-residents are no longer required to file a tax treaty relief application (TTRA) with the BIR to claim preferential tax treatment on their receipt of dividend, interest or royalty, based on the provisions of a tax treaty. In lieu of the TTRA required by RMO 72-2010, the BIR now adopts a self-assessment system and automatic withholding of tax using treaty rates subject to post-reporting validation and compliance checks on the withholding agent. Foreign investors would find this a welcome change.

Briefly, RMO 8-2017 prescribes the following procedure to avail of a preferential tax treatment under a tax treaty:

1. Before the paying the dividend, interest or royalty, a non- resident claiming tax treaty relief shall submit to the payor or withholding agent a duly accomplished Certificate of Residence for Tax Treaty Relief (CORTT) Form.

The CORTT is a new BIR Form that replaces the previous Form 0901 used on TTRAs for dividends, interest and royalties. This form requires the disclosure of relevant information on the non- resident income recipient, including country of residence, the applicable tax treaty and tax benefit claimed, as well as information on the withholding agent and details of the dividend, interest, or royalty payable.

The form must be signed by the (a) non- resident beneficial owner of the dividend, interest, or royalty, ( b) payor or withholding agent, and ( c) foreign tax office of country of residence of the non- resident, unless a separate Residence Certificate is issued by the foreign tax office that is attached to the CORTT Form.

For dividends, the CORTT Form is valid for a period of two years from its date of issuance, except for when the foreign tax office issues a separate Residence Certificate, in which case the validity of the latter certificate prevails. For interest and royalty, the CORTT Form is valid for all payments covered by the contract. Within its validity period, if subsequent dividend, interest and royalty payments are made, the withholding agent is required to update Part II of the CORTT Form and resubmit it to the BIR.

2. Within the periods prescribed by the regulations, the payor or withholding agent shall file BIR Forms 1601-F ( Final Withholding Tax Return) and 1601-CF (Annual Return on Compensation Taxes and Final Withholding Taxes) and pay withholding tax applying the preferential tax regime under the treaty.

The payor or withholding agent can automatically withhold tax at a reduced rate or exempt from tax based solely on the duly accomplished CORTT Form received from the non-resident.

3. Within 30 days after paying the withholding tax, the payor or withholding agent shall submit an original copy of the duly accomplished CORTT Form to the BIR International Tax Affairs Division (ITAD) and Revenue District Office (RDO) No. 39; and,

4. During the regular tax audit of the payor or withholding agent, the BIR will conduct a compliance check and postreporting validation on the correctness of the tax treaty relief claim.

The revised rules primarily rely on the CORTT Form as the basis for the automatic application of the lower treaty rate or exemption. If the non-resident fails to submit the CORTT Form to the payor or withholding agent, it will be taken to mean that the non-resident is not claiming any tax treaty relief and the dividend, interest or royalty income will be subject to the regular tax rate under the Tax Code.

It is important to make sure that the CORTT Form is complete, consistent with the tax filings of the withholding agent, and submitted on time to the BIR. Otherwise, the treaty relief claim is deemed non-compliant under RMO 8-2017. Non-compliance is a ground for denial of the non-resident’s claim for preferential tax treatment, as well as the disallowance of the expense as a deduction from the gross income of the payor or withholding agent.

Based on RMO 8-2017, the non-resident or the withholding agent is noncompliant in the following instances:

• Failure to meet the requirements in the relevant tax treaty.

• Non-filing of BIR Forms 1601-F or 1604-CF, or non-payment of the withholding tax due.

• Discrepancy between the information disclosed in the CORTT Form and BIR Form 1601-F.

• Failure to supply accurate and complete information in the CORTT Form and BIR Forms 1601-F and 1604-CF.

• Failure to file the CORTT Form with the BIR ITAD and RDO 39.

Again, note that RMO 8- 2017 applies only to tax treaty relief claims for dividend, interest and royalty. Nonresidents who seek to avail of tax treaty benefits for other types of income such as business profit, capital gain, income from services etc., shall continue to file a TTRA and obtain a confirmatory ruling from the BIR following the procedure under RMO 72-2010.

The simplified procedure under RMO 8-2017 is a much awaited change in the tax treaty relief process that benefits not only the taxpayers but also the BIR. The revised rules make it significantly easier for a non-resident to avail of tax treaty benefits and for the payor or withholding agent to comply with BIR requirements. RMO 8- 2017 also unclogs the workload of the BIR, particularly the ITAD, by eliminating numerous TTRA filings per year and evaluation of voluminous documents.

In the second part of this column, we will discuss the implications of RMO 8-2017, including its effect on TTRAs currently pending with the BIR, the 2013 decision of the Supreme Court in Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue (G.R. No. 188550), and other issues that may need further clarification from the BIR.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of EY or SGV & Co.