Toothless penalty?

On Aug. 19, 2013, the Supreme Court (SC) decided in the case of Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue (G.R. No. 188550) and made the emphasis that the BIR must not impose additional requirements that would negate the availment of the reliefs provided for under international agreements. The SC was referring to the BIR requirement to file a tax treaty relief application (TTRA) within a specified period to avail of the treaty rates.

The SC highlighted in the case that tax treaties are entered into to minimize, if not to eliminate, the acerbity of international juridical double taxation. This is why tax treaties are also known as double tax treaties or double tax agreements. The SC goes on to say that tax conventions are drafted with a view towards the elimination of international juridical double taxation. A state that has contracted valid international obligations is bound to make in its legislations those modifications that may be necessary to ensure the fulfilment of the obligations undertaken. Laws and issuances must ensure that the reliefs granted under tax treaties are accorded to the parties entitled thereto.

However, for the BIR, filing of TTRA is still required not for the approval of privileges but only for regulatory purposes and compliance checking.

Flash forward to 2017 when the BIR issued Revenue Memorandum Order (RMO) 8-2017 that simplified the filing of TTRA.

The RMO provides that non-residents claiming tax treaty relief shall submit a duly accomplished Certificate of Residence for Tax Treaty Relief (CORTT) form (Part I and II) or the prescribed certificate of residency with Part I (A, B and C) and II of the CORTT form to their withholding agents/income payors before income is paid or credited. Upon compliance with the CORTT requirements, the preferential treaty rates for interest, dividends and royalties shall be applied outright.

The withholding agent/income payor shall file BIR form 1601-F and BIR Form 1604-CF and shall pay the withholding taxes due, based on the treaty provisions, in accordance with the Tax Code and existing revenue issuances.

The withholding agent shall submit the CORTT form to the BIR International Tax Affairs Division (ITAD) and Revenue Division Office 39 within 30 days after the payment of withholding taxes.

But what is eyebrow-raising in this new RMO is Section 7 stating the penalties for non-compliance. The BIR severely penalizes non-compliance, resulting in the denial of the use of the preferential treatment rate or even the disallowance of the exemption. Hence, although the BIR has announced that the filing of TTRA with ITAD has been waived, non-compliance with the new RMO would still amount to a denial of the use of preferential rates. Bottom line, a taxpayer is still required to comply before reaping the benefits of tax treaties.

Failure to supply and complete the CORTT Form will render the non-resident and withholding agent non-compliant, similar to that of non-filing of TTRA. The RMO provides that the discrepancy between the information contained in the CORTT Form and the information on the 1601-F is also a ground for disqualification.

There is a discrepancy when the pieces of information provided in the CORTT Form and 1601-F are inconsistent. Note that the CORTT form is filed prior to payment of the income and submitted after remitting the withholding tax. For recurring payment of interest and royalties, discrepancies may arise as a result of movements in foreign exchange rate and other instances during the effectivity of the loan or royalty agreement. It is possible that the amount indicated in the CORTT form will differ from the amounts in the 1601-F. Hence, is there a risk that the validity of the treaty rate will be questioned, especially during audit?

Furthermore, the RMO still provides a deadline for submission of the CORTT form which is 30 days from payment of the withholding tax. According to the RMO, failure to beat this deadline will make the income payee liable to the regular income tax.

But the highlight of the SC decision in 2013 stated that the failure to strictly comply with the domestic law requirement under RMO No. 1-2000 to file a TTRA 15 days prior to a transaction should not deprive a taxpayer of a benefit of a tax treaty.

Or will the taxpayer who failed to file the CORTT be deprived of the remedy to refund the excessively withheld tax if, as has happened in previous cases, the taxpayer was only made aware of their tax treaty privilege and the CORTT requirement after the regular tax has been withheld and remitted?

On my point, did the BIR amend the Supreme Court Decision in 2013? Or to be more blatant about it, is the BIR courting contempt? A more cerebral reading will point to the fact that the penalty is toothless. Before the provision existed in a regulation, no less than the Chief Justice Maria Lourdes P. A. Sereno has spoken.

Did the Supreme Court preempt the effectivity of the RMO? 

Francis B. Rebuldela is an associate with the Tax Advisory and Compliance division of P&A Grant Thornton.

As published in BusinessWorld, dated 11 July 2017