Tax treaty relief made easy
(Second of two parts)
In last week’s article, we discussed the revised procedure to avail of tax treaty benefits for dividend, interest, and royalty payments under Revenue Memorandum Order (RMO) No. 8-2017. Under the amended rules, a tax treaty relief application (TTRA) is no longer required and withholding agents can automatically apply the preferential tax treatment — lower tax rate or exemption — on such payments upon receiving the Certificate of Residence for Tax Treaty Relief (CORTT) Form from the non-resident.
The effect of the new rules on TTRAs already filed and pending with the Bureau of Internal Revenue (BIR) is an urgent concern for taxpayers. The transitory provision of RMO 8-2017 states that non-residents who filed TTRAs before its effectivity on June 26, 2017 are authorized to claim the preferential tax treatment subject to a compliance check by the BIR. When the new rules take effect, it appears that the BIR will no longer process pending TTRAs covering dividend, interest and royalty.
However, the BIR may need to clarify whether dividend, interest and royalty covered by pending TTRAs (but are paid after the effectivity of RMO 8-2017) are covered by the new procedure that requires the submission of a CORTT Form. This applies, for example, in a case where, before the effectivity of RMO 8-2017, a non-resident filed a TTRA under a royalty agreement with periodic payments over a five-year period. In such a scenario, it is not clear whether the non-resident and withholding agent will still be required to submit a CORTT Form for payments made after 26 June 2017.
RMO 8-2017 puts emphasis on the proper, complete, and consistent declaration and submission of the CORTT Form. The CORTT Form must be signed by the non-resident, the foreign tax office, and the withholding agent. In this regard, RMO 8-2017 does not state whether the CORTT Form has to be consularized by the Philippine embassy or consulate at the place of execution. Normally, the BIR requires documents executed outside the Philippines to be consularized. This is important as the consularization process could take some time, which will then need to be taken into account in the preparation of the said document. The BIR may wish to clarify this matter as well.
Another question for taxpayers is whether there is no need to prepare and keep the documents previously required in TTRAs under RMO 72-2010. For example, in a TTRA for dividend, the BIR required a Corporate Secretary’s Certificate as to the percentage shareholding of the non-resident in the Philippine company payor. RMO 8-2017 no longer requires this document to be submitted to the BIR. It is expected, however, that during the compliance check upon a tax audit of the payor or withholding agent, the BIR will ask for documentation to prove the percentage ownership of the non-resident in the payor to validate whether the ownership condition in the treaty is met.
The BIR strictly penalizes non-compliance with the procedures prescribed under RMO 8-2017 by disqualifying the non-resident from the tax treaty relief claim and disallowing the expense deduction of the withholding agent. Non-compliance includes failure to file the withholding tax return, failure to supply correct and complete information, and failure to submit the CORTT Form. Although the Commissioner is authorized under the Tax Code to prescribe rules and impose sanctions for any violation, a question may arise on the reasonableness of the penalty for non-compliance with the administrative requirements under RMO 8-2017.
This brings to mind the decision of the Supreme Court in Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue (G.R. No. 188550, August 28 2013) involving a non-resident’s claim for tax treaty relief. In this case, the Supreme Court held that the BIR “must not impose additional requirements that would negate the availment of the reliefs provided for under international agreements,” especially where the tax treaty itself does not prescribe said additional conditions.
The Supreme Court ruling, which has been cited by the Court of Tax Appeals in a number of recent cases, further held that a non-resident may not be deprived of tax treaty benefits for failure to strictly comply with an administrative procedure. Notably, the instances of non-compliance under RMO 8-2017 are administrative in nature. In this regard, a question arises on whether the provisions of RMO 8-2017 are consistent with the ruling of the Supreme Court in the Deutsche Bank case.
While the BIR has relaxed the rules on tax treaty relief claims for dividend, interest and royalty, it should be pointed out that RMO 8-2017 imposes strict guidelines to be followed where non-compliance is severely penalized. In this regard, it is in the best interest of both the non-resident and the payor or withholding agent to follow the revised rules. Given this, it would also be helpful if the BIR can further clarify issues to avoid future controversy and ensure compliance with the procedure and requirements prescribed by RMO 8-2017.