BIR order superseding tax treaty riles taxpaying public

Internal Revenue Commissioner Kim Henares has again defied a Supreme Court ruling on the self-executory nature of tax treaties by issuing a circular prescribing additional requirements before privileges granted under a tax treaty may be enjoyed.

Henares issued Revenue Memorandum Circular No. 37-2014, announcing the coming into force of the Philippines-Kuwait treaty on double taxation and tax evasion, affecting income derived or accrued beginning January 1, 2014.

But the circular provides that tax-treaty relief should first be filed with the International Tax Affairs Division (ITAD), in accordance with Revenue Memorandum Order No. 72-2010, which provides that applications to avail of privileges granted under tax treaties must be filed with the ITAD before the transaction covered by the tax privilege takes effect.

“Tax Treaty Relief Applications invoking the Philippines-Kuwait Double Taxation Agreement should be filed with and addressed to the ITAD,” the new circular said.

Henares invoked RMO 72-2010 in requiring prior approval by the Bureau of Internal Revenue (BIR) before the tax treaty privileges can be availed of, despite a Supreme Court ruling which said that the BIR may not impose additional requirements before a foreign taxpayer can avail of a privilege granted by a tax treaty because it would violate the doctrine that treaties entered into by a State must be complied with in good faith.

In the Supreme Court case entitled “Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue,” the court said that a requirement that prior approval of the BIR must be secured before a privilege under a tax treaty can be availed of is not a mandatory requirement that will preclude the taxpayer from enjoying the tax privileges altogether.

But the BIR’s new circular, in conjunction with RMO 72-2010, will effectively impose new requirements before Kuwaiti taxpayers can avail of privileges granted by the tax treaty because RMO 72-2010 provides that tax treaty relief applications (TTRA) must be filed before the transaction, and failure to do so “shall have the effect of disqualifying the TTRA.”