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As a
general rule, the provisions of Philippine tax laws
apply on the income, gain or profit of any person liable
to income tax, including income earned by nonresidents.
There are bilateral tax treaties, however, which the
Philippines has concluded with other states that may
provide different tax treatments with respect to incomes
and rates of taxes. As species of tax benefit, the
provisions of such treaties will govern the taxation of
income payments to nonresident foreign persons when, for
instance, they provide for income-tax exemption or
prescribe for tax rates lower than those imposed by our
local tax laws.
In the
payment of internal revenue taxes, one may ask: Is it
enough for the taxpayer to simply invoke the provisions
of a tax treaty and claim exemption from tax or the
application of special or preferential tax rates? Are
there procedural rules to keep in mind?
Revenue
Memorandum Order (RMO) 1-00, dated November 25, 1999,
was issued by the Bureau of Internal Revenue (BIR) to
cover applications for tax-treaty relief, including
claims or requests for tax exemption, preferential
tax-treaty rate, refund or credit of taxes on the
following income derived or to be derived by the
taxpayer under existing tax treaties, to wit: (a)
dividends; (b) interests; (c) royalties; (d) business
profits; (e) gains from sale of shares of stocks; (f)
salaries, compensation, etc.; (g) income from services;
(h) profits from the operation of ships and air
carriers; and (i) all other income covered by tax
treaties.
In RMO
1-00, the BIR declared that it is to the best interest
of both the taxpayer and the BIR to require any
availment of the tax-treaty provisions to be preceded by
an application for treaty relief with the International
Tax Affairs Division (ITAD) of the BIR. In this way,
the BIR opined, “the consequences of any erroneous
interpretation and/or application of the treaty
provisions [i.e., claim for tax refund/credit for
overpayment of taxes, or deficiency-tax liabilities for
underpayment] can be averted before proceeding with the
transaction and or paying the tax liability covered by
the tax treaty.”
Section
III of RMO 1-00 strictly prescribes that any availment
of the tax-treaty relief shall be preceded by an
application duly filed with the ITAD at least 15 days
before the transaction i.e. payment of dividends,
royalties, etc., accompanied by supporting documents
justifying the relief.
This
mandatory provision of RMO 1-00 was highlighted in a
recent case decided by the Court of Tax Appeals (CTA).
In this case, the petitioner, a Philippine branch of a
foreign company, withheld and paid branch profit
remittance tax (BPRT) on the net income due for
remittance to its parent company based on the regular
15-percent rate prescribed under Section 28 (A)(5) of
the Tax Code of 1997.
On the
belief that there was overpayment of tax, petitioner
filed an administrative claim for refund or issuance of
tax-credit certificate with the BIR. On the same day,
petitioner filed an application for confirmatory ruling
with the ITAD, claiming that the BRPT rate applicable to
its remittance of branch profits should only be 10
percent pursuant to the provisions of the tax treaty.
The CTA,
noting petitioner’s failure to file the ITAD application
on time, denied the claim for tax refund/tax credit and
held that “petitioner’s erroneous payment of the regular
tax rate should not work in its favor so as to exempt it
from filing the required application for entitlement…nor
should it exculpate petitioner from its nonobservance of
the reglamentary period.” Thus, the noncompliance with
the requirements set forth under RMO 01-2000 was fatal
to the petitioner’s claim for refund.
The CTA
went on to say that “[a] foreign corporation wishing to
avail itself of the benefits of the tax treaty should
invoke the provisions of the tax treaty and prove that,
indeed, the provisions of the tax treaty applies to it,
before the benefits may be extended to such
corporation. Otherwise stated, a resident or
nonresident foreign corporation shall be taxed according
to the provisions of the [Tax Code of 1997], unless it
is shown that the treaty provisions apply to the said
corporation; and that, in case that the same are
applicable, the option to avail of the tax benefits
under the tax treaty are successfully invoked.” (CTA
Case No. 7344, August 29, 2008).
In sum,
the taxpayer is not at liberty to determine for himself
his entitlement to certain tax exemptions or
preferential tax rates based on the provisions of a tax
treaty, or even our local revenue laws, for that
matter. It really pays to have adequate knowledge of
the tax rules affecting transactions with nonresident
foreign persons or entities, where payables go by the
millions. This is when having sound tax compliance and
advisory onboard your business comes in handy.
After
all, the line “better late than sorry” finds no page in
the taxman’s book.
(The author is an associate of BDB Law. If you have
any comments or questions concerning the article, you
may e-mail the author at JeanRoss.Abenasa@bdblaw.com.phor
call 856-2952.) |
