Guidelines in the Availment of Tax Treaty Relief
By: Atty. Mabel L. Buted
"Under the new rules, prior application for tax treaty benefits is no longer required. Tax relief under the treaties may be availed outright. The withholding agent or income payor may rely on the Tax Residency Certificate (“TRC”) issued by the tax authority of the nonresident income payee in applying the lower tax rate or tax exemption provided in the treaty. In such case, the income payor must still file subsequently an application in the form of a request for confirmation of the tax treaty relief. The application should be filed not later than the last day of the fourth month following the close of the taxable year."
Mabel L. Buted
Partner
+632 8403-2001 loc.160
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In 2021, the Bureau of Internal Revenue (“BIR”) issued Revenue Memorandum Order (“RMO”) No. 14-2021, updating the procedures in availing tax reliefs under tax treaties. The BIR modified the manner of confirming entitlement to treaty benefits, in light of the pronouncement made by the Supreme Court in the case of Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue (G.R. No. 188550, August 19, 2013).
In this case, the taxpayer paid the regular tax due on the branch profit remittances to its head office, and thereafter invoked the lower tax rate applicable under the tax treaty and filed a claim for refund for the overpayment. The Supreme Court, in granting the taxpayer’s claim for refund, ruled that the then requirement under RMO No. 1-2000 of a prior application of tax treaty relief should not operate to divest the entitlement to the relief. At most, the application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief. Further, the Court held that the fact that the taxpayer invoked the provisions of the tax treaty when it requested for a confirmation from the BIR before filing an administrative claim for a refund should be deemed substantial compliance with RMO No. 1-2000.
Under the new rules, prior application for tax treaty benefits is no longer required. Tax relief under the treaties may be availed outright. The withholding agent or income payor may rely on the Tax Residency Certificate (“TRC”) issued by the tax authority of the nonresident income payee in applying the lower tax rate or tax exemption provided in the treaty. In such case, the income payor must still file subsequently an application in the form of a request for confirmation of the tax treaty relief. The application should be filed not later than the last day of the fourth month following the close of the taxable year.
The parties may, however, apply the regular tax rate first and later invoke the benefit under the tax treaty. In this situation, the rules provide that the nonresident payee should file the tax treaty relief application (“TTRA”) any time after the receipt of the income.
In general, the following documents must be submitted in the application: (a) letter-request; (b) Application Form; (c) TRC of the foreign payee for the relevant period; (d) any document evidencing the payment or remittance of income; (e) withholding tax return with Alphalist of Payees; (f) proof of payment of withholding tax; and (g) Special Power of Attorney, expressly stating the authorized representative to file the application. Depending on the type of income, there are also specific requirements that must be submitted like invoices duly issued by the income recipient and proofs that the payment of income is not effectively connected with the permanent establishment of the foreign enterprise. For income constituting business profits, the authority of the signatories to sign the contract must be shown. In addition, a Certificate of Completion of the project needs to be executed. For interest, if the parties are related to each other, there must be proof that the interest is imposed at arm’s length rate. For dividends, the Audited Financial Statements and the General Information Sheet must be provided.
For long-term contracts involving payment of income where the condition for entitlement to treaty benefits is dependent on time threshold, like service income, an annual updating is mandatory, unless the Certificate of Entitlement is issued with a tenor that allows the ruling to be applied to subsequent or future transactions.
Sans the rule on prior application, the old procedures in processing applications for tax treaty relief appear to be more practical and less complicated to follow and comply. To recall, RMO No. 72-2010 allows either the nonresident income earner or the domestic payor-withholding agent to file. Unlike in the new rules, previously, there was no distinction between a request for confirmation filed by the income payor and a TTRA applied by the nonresident payee. It should be noted that the requirements in a request for confirmation and TTRA under the new rules are essentially the same.
Further, the process under the previous rule is accomplished on a per contract basis and no annual updating is required. Many requirements under RMO No. 14-2021 that are not relevant in the determination of the nonresident’s entitlement to tax relief were also added. Documents proving that the transactions are authorized and contracted at fair value can be removed.
The present guidelines in the availment of tax treaty benefits should be further simplified. In entering into double tax agreements with other countries, our government is expected to keep and observe the provisions contained in the treaties in good faith. Further to this, its policies and programs must help ensure ease in compliance rather than making it difficult for the parties to comply, which may ultimately result in the denial of entitlement - an abrogation of the government’s commitment under the treaties.
The author is a 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 This email address is being protected from spambots. You need JavaScript enabled to view it. or call 8403-2001 local 160.
