Non-resident individuals and corporations with income from sources within the Philippines may be liable for taxes both in the Philippines and their country of residence. To avoid double taxation, the Philippines has negotiated with 40 other countries treaties providing tax benefits to each other’s residents. The non-residents may claim tax exemption or a preferential tax rate should they qualify under the respective tax treaties.
The Bureau of Internal Revenue (BIR) issued Revenue Memorandum Order (RMO) No. 8-2017 to provide for new procedures in claiming preferential tax treaty benefits on royalty, interest, and dividend (RID) income of non-residents pursuant to effective tax treaties in the Philippines, superseding RMO No. 72-2010.
Old process for treaty benefits
Under RMO No. 72-2010, the BIR requires a tax treaty relief application (TTRA) before a non-resident can apply the preferential treatment per tax treaty. Aside from a request letter, the BIR requires various documents as attachments to the TTRA—consularized articles of incorporation, proof of residency, and other relevant documents—which entail a long period to collate.
It usually takes several months to a few years before non-residents can secure the confirmatory ruling entitling them to claim the tax treaty relief.
So, what’s new?
In keeping with the government’s policy to improve the ease of doing business in the Philippines, the BIR decided to do away with the TTRA for RID income. In lieu of the TTRA, preferential treaty rates for RID shall be applied and used outright by the withholding agents upon the non-resident’s submission of a Certificate of Residency for Tax Treaty Relief (CORTT) Form.
The CORTT will replace the old 0901 Forms intended for tax treaty relief application for dividend, interest, and royalty incomes. The CORTT Form shall serve as proof of the non-resident’s residency, which is the minimum requirement to avail of preferential tax treaty rates or tax exemption under all effective tax treaties of the Philippines.
Non-residents are allowed to use the prescribed certificate of residency of their country of residence. If this is used, it shall be attached to the CORTT Form.
For dividend income, the CORTT Form shall be valid for two years from date of issuance. However, if the prescribed certificate of residency of the country of residence is used, the date of validity of this document will prevail over the two-year period given. For interest and royalty, the CORTT Form shall be valid per contract.
Withholding agents or income payors can withhold at a reduced rate or exempt the non-resident based on the duly accomplished CORTT Form submitted to them.
The International Tax Affairs Division (ITAD) and Revenue District Office (RDO) No. 39 shall be in charge of receiving and recording information stated in the CORTT.
A compliance check and post-reporting validation on withholding tax obligations and confirmation of appropriateness of availment of treaty benefits shall be conducted as part of regular audit investigations conducted by the RDO where the domestic withholding agent is registered.
How to claim
Non-residents claiming tax treaty relief shall submit a duly accomplished CORTT Form, or the prescribed certificate of residency with Part II of the CORTT Form to their withholding agents before income is paid or credited.
The withholding agent/income payor shall file BIR Form 1601-F and BIR Form 1604-CF and shall pay the withholding taxes due in accordance with the Tax Code and existing Revenue Issuances.
The withholding agent/income payor shall submit an original copy of the duly accomplished, or the prescribed, certificate of residency with Part II of the CORTT Form to ITAD and RDO No. 39 within 30 days after payment of withholding taxes due on the dividend, interest, and royalty income of the non-resident based on the applicable tax treaty.
The withholding agent shall submit an updated Part II of the CORTT Form within 30 days after payment of withholding taxes due if the CORTT Form filed with ITAD and RDO No. 39 is used for another dividend payment within its prescribed period of validity, or in case of staggered payment of interest and royalty income.
Consequence of failure to follow procedures
Failure to submit a CORTT Form to the withholding agent would mean that the non-resident is not claiming any tax treaty relief and, therefore, such income shall be subject to the normal rate. Also, any violation of the provisions of the RMO shall be subject to penalties, as provided for in the Tax Code.
Status of existing TTRAs
Non-residents who already filed TTRAs with the BIR on royalty, interest, and dividend income prior to the effectivity of the RMO will be allowed to use the tax treaty rates invoked based on effective tax treaties of the Philippines with other countries. However, the same will be subjected to a compliance check.
For existing TTRAs with supporting documents that are already with the BIR, ITAD will use the submitted information to create a database for purposes of tax treaty relief availment. If the requisite certificate of residency is not available in the submitted documents, the withholding agents/income payor will be requested to submit the same.
BIR Commissioner Caesar Dulay signed the RMO on March 28, 2017; it will take effect 90 days thereafter, (June 26).
Prior to the effectivity of RMO No. 8-2017, the procedures for RMO No. 72-2010 will remain in effect. Though not advisable, non-residents may still be allowed to file their TTRA with the ITAD. Any TTRA that will be filed before the effectivity shall be treated as an existing TTRA, allowing the non-residents to use the tax treaty rates invoked, subject to a compliance check of the BIR.
Removing the prior TTRA requirement, which, from our experience, takes months or years to completely comply with, is a relief on the part of non-residents claiming benefits on their royalty, interest, and dividend income within the Philippines. This simpler process will make it easier for foreign investors to do business in the Philippines and will help create a friendlier investment climate.
The author is a Senior with the Tax & Corporate Services division of Navarro Amper & Co., the local member firm of Deloitte Southeast Asia Ltd., a member firm of Deloitte Touche Tohmatsu Limited—comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.