Taxes are the lifeblood of our government and, by paying the right taxes, we contribute what is due to society. There are instances, however, that another tax could be imposed by the government of another country on the same income; thus, the establishment of a tax resident status by a taxpayer might be necessary.
The Bureau of Internal Revenue (BIR) recently issued Revenue Memorandum Order (RMO) No. 51-2019 to guide the taxpayers on the procedures and requirements for applying for a Philippine Tax Residency Certificate (TRC). But what is a Philippine TRC? Why would this be relevant to corporations?
WHAT IS A PHILIPPINE TRC, AND WHO MAY APPLY FOR IT?
A Philippine TRC would prove that a corporation is a Philippine resident. Under Philippine rules, a Philippine resident corporation (or a domestic corporation) is subject to Philippine tax on its worldwide income; and hence, it is taxed both on its income sourced within the Philippines and income sourced from other countries.
Under RMO No. 51-2019, the BIR — International Tax Affairs Division (ITAD) is quite clear with its dilemma on receiving numerous applications from taxpayers not eligible for the Philippine-issued TRC, meaning, from taxpayers not considered residents in the Philippines for tax purposes. The BIR, hence, clarified that only resident citizens and domestic corporations are considered residents, because only they are subject to tax on their worldwide income. Accordingly, the BIR-ITAD, upon the issuance of RMO No. 51-2019, shall no longer accept TRC applications of resident aliens and resident foreign corporations.
WHY IS THE PHILIPPINE TRC RELEVANT?
As earlier mentioned, a Philippine TRC may be applied for by a domestic corporation. The reason for such application is when a domestic corporation has foreign-sourced income, and the said corporation wishes to avail of the tax treaty benefits — that is, lower preferential tax rates or a possible tax exemption in the foreign country; and the Philippine TRC is required to be presented to the counterparty in the foreign country.
For example, XYZ Philippine Corp. has interest income on loans extended to its affiliate in a foreign country. In that country, the interest income is generally subject to withholding tax at 22% (but subject to the lower rate of 15% based on tax treaty provisions). For XYZ Philippine Corp. to avail of the lower rate of 15%, it may be required by its counterparty-debtor to furnish a copy of the proof of its status as a Philippine tax resident. Hence, the Philippine TRC will be relevant.
HOW IS THIS RELATED TO THE CONCEPT OF CREDITING OF TAXES PAID BY A DOMESTIC CORPORATION IN FOREIGN COUNTRIES?
Tax crediting means that our Philippine tax laws offer relief from double taxation in the form of foreign tax credits, which allow a reduction in the taxpayer’s tax liability in the Philippines. The amount or reduction is generally based on the amount of foreign taxes actually paid on foreign-sourced income, but subject to certain conditions and limitations based on a mathematical formula prescribed by Philippine tax laws.
There could be cases where the actual amount of foreign taxes paid in the other country could not be claimed in full in the Philippines, because of the limitations. This normally occurs if the tax rate in the foreign country is higher than the tax rate in the Philippines. Thus, there would be an apparent lost portion of the amount of foreign tax paid that would not be utilized in the Philippines.
The idea, therefore, is to be subjected to a lower tax rate on foreign-sourced income in the foreign country, to the extent possible (i.e., by virtue of tax treaty provisions).
Please note that there is a possibility that, in the future, the corporate income tax rate in the Philippines could be significantly reduced. Thus, it would be helpful that any foreign-sourced income be subjected to the lowest possible tax rate in the foreign country to avoid any uncreditable foreign taxes.
If, ultimately, the taxpayer would benefit more from securing a Philippine TRC, considering also the materiality of the amount of benefit, then the taxpayer should go for it.
HOW TO FILE AN APPLICATION FOR A TRC?
To secure a TRC, the requirements under RMO 51-2019 are: the letter request, proof of transaction, certified true copies of Certificate of Registration, Income Tax Returns, Value-Added Tax Returns or Percentage Tax Returns, and Audited Financial Statements, among others. The long list of requirements can be found in the annexes of the RMO, specifically Annex B for corporate applicants.
The assessment offices of the BIR and ITAD will also establish a procedure wherein the ITAD will act as the repository of the documents substantiating the foreign-sourced income of the Philippine taxpayers, and shall furnish the appropriate Revenue District Office (RDO) or Large Taxpayers Division (LTD) of all documents submitted by the applicant. Through this, the concerned RDO or LTD will verify whether the income was properly reported or declared in the tax returns, and the corresponding tax was paid. If not, the RDO or LTD shall determine the deficiency tax and enforce on the applicant-taxpayer the collection thereof, including penalties. This could mean that, the taxpayers applying for a Philippine TRC should also be audit-ready.
Based on the discussions on the different aspects of the Philippine TRC, a corporate taxpayer should weigh the costs and benefits of applying for a TRC, considering the amount of taxes that could be saved, and considering the other implications of such an application. Before your corporation applies, you have to ensure that all the requirements can be complied with; otherwise your time and efforts would be wasted.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Jemila Paula I. Diala is a senior of Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.
As published in BusinessWorld, dated 12 November 2019