Applying for relief from double taxation

The granting of an exemption from Philippine taxes is one relief taxpayers may avail themselves of to avoid the burden of double taxation. Where the taxpayer is a resident of a country with which the Philippines has an existing tax treaty, he should first check whether he is eligible to receive the treaty’s benefits such as tax exemption in the local jurisdiction, among other things.

However, it is a hornbook doctrine that tax exemptions are construed strictly against the taxpayer and liberally in favor of the government. Thus, in the granting of tax exemptions, the grantee has the burden to prove that he is, indeed, entitled to the tax exemption or, at the very least, be covered by preferential tax rates. To do this, the taxpayer must not only prove his claim but must also substantiate it, i.e., submit written proof that he is entitled to the exemption as he claims.

However, even with the substantiation, the eligibility of a taxpayer to avail himself of a tax exemption or of a preferential tax rate is not automatically granted. The taxpayer must secure a ruling from the Bureau of Internal Revenue (BIR) through the International Tax Affairs Division (ITAD) that he may avail himself of preferential rates under existing tax treaties. This was laid down by the Court of Tax Appeals (CTA) in CTA EB 40, June 7, 2005, on CTA Case 6382, wherein an application for refund for tax erroneously withheld was denied for failure to secure an ITAD ruling. 

Revenue Memorandum Order (RMO) 1-2000 provides the procedure for processing tax-treaty relief application. Under RMO 1-2000, taxpayers who wish to avail themselves of tax- treaty relief should accomplish BIR Form 0901—Application for Relief from Double Taxation—and file the same together with the supporting documents to the ITAD at least 15 days before the transaction, i.e., payment of royalties, dividends, etc. RMO 1-2000, however, does not specify the types of documents needed to support an application for tax-treaty relief.

In order to simplify or streamline the processing of tax-relief applications, the ITAD came up with a draft revenue memorandum circular (RMC) prescribing the guidelines on the processing for relief from double taxation, including the minimum documentary requirements to support claims for application for relief from double taxation. 

Notably, under the draft RMC, availment of preferential tax rates and exemptions provided under Philippine tax treaties need not be preceded by an application for tax-treaty relief. However, if later the BIR discovers that the facts surrounding the transaction do not warrant the application of the preferential tax rate of exemption, the correct amount of taxes and appropriate penalties will be collected from the taxpayers.  In order to avoid this, the taxpayer has the option to file a tax-treaty relief application.

One of the significant changes under the draft RMC is the period within which to file applications for tax-treaty relief. Under the draft RMC, the application must be filed within 30 days from the occurrence of the first taxable event. Under RMO 1-2000, the filing must be made 15 days before the occurrence of the transaction. In the draft RMC, such requests for rulings will be construed and identified as “No Ruling Area” being in the nature of hypothetical transactions or future transactions. Hence, the ITAD may reject the requests for ruling.

Under the draft RMC, it is important to submit all the required attachments because when the requests for rulings are not accompanied by complete documents, the ITAD may refuse to accept the application. Also, should the application be received by other BIR offices and the same is not accompanied by documents as prescribed, the application shall outright be deemed as a “No Ruling Area.”

It is also provided under the draft RMC that taxpayers are allowed to invoke as a precedent ruling only those that had been signed by the BIR and not merely by any other officer pursuant to a delegated authority. It should be noted, however, that since the rulings under delegated authority were supposedly issued based on rulings of first impressions issued by the BIR, they can also serve as precedent rulings.

Finally, the draft provides that the ruling must be available for release after 30 working days from the date of receipt of the application for relief from double taxation. Of that period, the ITAD shall have 20 working days to process and evaluate the application, while the legal service shall have 10 working days. This would be a welcome development as this would lead to a faster processing of applications for treaty relief.

Overall, the draft RMC satisfies the need for a clear-cut guideline when applying for relief from double taxation. It is thus commendable that the ITAD has come up with a draft circular which will streamline the processing of tax-treaty relief application and identify the documents which should accompany applications for tax-treaty relief. Through this issuance, and more so when the forgoing observations and other comments are considered, it is hoped that it would become much easier for taxpayers to be able to prove and substantiate their claims for relief from double taxation. 

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The author is an associate of BDB Law. If you have any comments or questions concerning the article, you can e-mail the author at gloria.a.camora@bdblaw.com.ph or call 856-2952.

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