“Change is inevitable. Change is constant.” — Benjamin Disraeli
Change — it may mean alteration, modification, variation, conversion, transformation, or amendment. Whichever way we view it, change will always be part of our lives whether we like it or not. Our Philippine tax laws have been recently amended to lower the tax rates on income received by individual taxpayers to keep up with the changing times. As part of the move to keep up with our neighbors and be competitive, our Congress is now aiming to amend our tax laws to reduce the corporate income tax.
A few weeks ago, the House of Representatives transmitted House Bill No. 4157 or the Corporate Income Tax and Incentives Rationalization Act (CITIRA) to the Senate. HB No. 4157 aims to reduce the corporate income tax from the current rate of 30% to 20%. Aside from reducing the tax rate for domestic corporations and resident foreign corporations, the bill also proposes to amend the tax rate imposed on income received by a nonresident foreign corporation (NRFC) from Philippine sources. The current provision of the Tax Code, Section 28 (B) on tax on NRFCs, imposes a 30% tax on gross income received from the Philippines. Under the provisions of CITIRA, the tax rate under Section 28 (B) of the Tax Code is to be lowered to 20% over 10 years, with a staggered reduction of 1 percentage point per year.
One of the most common means of income received by a NRFC from Philippine sources is dividends. Under the present tax rules, the final withholding tax rate applicable to such dividends is generally 30%. This rate may be lowered for a qualified NRFC, wherein it may avail of the dividend tax sparing rate of 15% or the tax treaty rates, subject to certain conditions. These conditions include compliance with certain administrative procedures that are oftentimes the subject of debate and clarification, which could be unappealing to foreign investors.
However, the proposed gradual reduction of the general tax rate on dividends for NRFC from 30% to 20% could be a better option for NRFCs, as they need not worry about the conditions and administrative requirements related to the dividend tax sparing rate of 15% or the tax treaty rates, if they just wish to be taxed at the general dividend tax rate. If the bill is passed to a law, the general tax rate would be 20% in 2029. This rate is equal to or even better than the top prescribed dividend tax rates in some tax treaties.
A cursory check of some of the existing tax treaties of the Philippines with other countries reveals that, for India, Indonesia, and Thailand, while their respective tax treaties provide a lower rate of 10% to 15%, subject to certain conditions, the top dividend tax rate therein is still 20%, in which case the said rate would just be the same as the proposed general tax rate of 20% in 2029.
For Australia, France, South Korea, Malaysia, Singapore, and the UK, the top dividend tax rate provided under their respective tax treaties is 25%. In this case, the proposed general tax rate under the CITIRA bill will be lower even before 2029. Similarly, the United States’ tax treaty with the Philippines provides for a 25% top rate and only 20% as the lowest rate.
Under the CITIRA bill, the President may advance the scheduled reduction in the corporate income tax rate when adequate savings are realized from the rationalization of the identified fiscal incentives, as certified by the Secretary of Finance.
While Japan, Germany, and Vietnam have tax treaties that provide a top dividend tax rate of only 15%, at least the proposed general rate of 20% will not be too high when an NRFC is considering its options.
In summary, the proposed change in the tax rate to 20% will be gladly received by everyone for several reasons. First, lowering the tax rates on the dividend income received by NRFCs may make the Philippines more attractive to investors. Second, considering that the general tax rates and those provided under some tax treaties may be the same in the future, an NRFC will now be able to enjoy lower tax rates on their dividends without going through certain conditions and administrative requirements. Third, if the NRFC will no longer file for the Certificate of Residence for Tax Treaty Relief (CORTT) forms for dividends, as the proposed general rate could be more advantageous than the tax treaty rate in some cases, the Bureau of Internal Revenue will now have fewer documents to process and review and will have more time to perform other duties.
The proposed lowering of the dividend tax rate for NRFC in CITIRA will surely be a great boost to making the Philippines a more attractive place for investment. An option to be taxed at a lower rate and not be bothered about compliance requirements on dividends tax is a positive change towards achieving the goal of making it easier to do business in the Philippines. Since change is something we cannot escape, let us just hope that the Philippine is moving towards meaningful and positive change.
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.
Jennylyn V. Reyes is a tax manager of Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.
As published in BusinessWorld, dated 01 October 2019