“They won’t fear it until they understand it. And they won’t understand it until they’ve used it.”—a quote in Christopher Nolan’s most recent masterpiece, Oppenheimer, which simply emphasizes the fear and/or power of knowledge, or its lack thereof. The movie engulfed its viewers with dread and unease as it beautifully portrayed how warring nations razed each other during extreme turmoil. This is in contrast to the present, in which modern-day nations contribute to each other’s development. From a tax practitioner’s perspective, the established tax treaty agreements implemented by various countries are great illustrations of collaboration between nations. As a refresher, discussed below are some of the relevant processes and requirements for availing of the benefits granted by the tax treaties.
What are the benefits and how is it applied?
As a progressing country, the Philippines has established agreements with various countries to address the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on the income of their respective residents. Duly entitled taxpayers benefit from tax treaties by granting them the statutory right to implement preferential tax rates or exemptions in their various transactions, such as dividends, interests, capital gains, royalties, business profits, etc. As stated in Revenue Memorandum Circular (RMC) 77-2021, only natural or juridical persons who are residents of one or both Contracting States, as supported with a Tax Residency Certificate (TRC), may avail of the reduced rate of, or exemption from tax, depending on the relevant provision on the tax treaty. Once the above are established, a formal application can be made in the form of a Request for Confirmation (RFC) or a Tax Treaty Relief Application (TTRA).
RFC and TTRA, what is the difference?
The type of application would vary depending mainly on whether the regular or preferential rates were applied to the item of income.
If the regular rates have been imposed on the said income, the nonresident, or its authorized representative, should then file a TTRA and a claim for refund. On the contrary, when the tax treaty rates have already been applied by the withholding agent (WA) or income payor on the income earned by the nonresident, the WA or income payor shall file an RFC on the proprietary of the withholding tax rates applied on the said item of income.
Where and when do we submit the TTRA or the RFC?
Both applications, together with the complete documentary requirements, shall be filed with the International Tax Affairs Division (ITAD) of the BIR, subject to the Division’s inspection, review, and approval.
The RFC shall also be filed as below:
a. Capital Gains – to be filed at any time after the transaction but shall not be later than the last day of the fourth month following the close of the taxable year when the income is paid or when the transaction is consummated.
b. Other types of income – to be filed at any time after the close of the taxable year but not later than the last day of the fourth month following the close of such taxable year when the income is paid or becomes payables, or when the expense/asset is accrued or recorded in the books, whichever comes first.
On the other hand, the TTRA shall be filed by the nonresident taxpayer at any time after the payment of the withholding tax under the regular rate, depending on when the nonresident will invoke its entitlement to treaty benefits. Note, however, that all claims for refund should still be filed within the two-year prescriptive period provided under Section 229 of the Tax Code, as amended.
What are the Documentary Requirements for the Application of RFC or TTRA?
In either submission, the ITAD will be evaluating the applicability of the tax treaty rates to the specific transaction noted by the Taxpayer in its application. As such, the original or certified true copy of the below general documents, among others, is required to be submitted:
- Application Form duly signed by the nonresident income recipient or its authorized representative;
- Tax Residency Certificate (TRC) for the relevant period, duly issued by the tax authority of the foreign country in which the income recipient is a resident;
- Bank documents/certificate of deposit/telegraphic transfer/telex/money transfer evidencing the payment/remittance of income;
- Withholding tax return with Alpha list of Payees;
- Proof of payment of withholding tax;
- Notarized Special Power of Attorney (SPA) issued by the nonresident taxpayer to his/her authorized representative(s), which shall expressly state the authority to sign the Application Form as well as to file the TTRA or request for confirmation.
Moreover, Revenue Memorandum Order (RMO) 14-2021 explicitly states the additional documentary requirements, which are specific depending on the nature of the subject matter transaction in the application. Further, all documents executed in a foreign country must either be authenticated by the Philippine Embassy stationed therein or apostilled if the said foreign country is a signatory to the Convention Abolishing the Requirement of Legalisation for Foreign Public Documents (HCCH 1961 Apostille Convention) to be acceptable in the Philippines. On a case-by-case basis, taxpayers usually take weeks to months of processing, in addition to the hectic process of collating the required documents, to complete the authentication procedures. It is therefore advisable for the applicant to consider the length of time needed to secure the authenticated documents when choosing between TTRA and RFC applications since the latter has a stricter timetable.
What is the effect of a Grant or Denial of an Application?
RMO 14-2022, as echoed by RMC 20-2022, states that once the application is officially approved, the ITAD shall then issue a Certificate of Entitlement (COE) for both TTRA and RFC. Said certificate contains the factual and legal basis which led to the application's approval. The certificate also grants the nonresident taxpayer subjected to regular rates under a TTRA the right to claim a refund on the difference between the regular taxes withheld and preferential tax rates under the tax treaty provision.
On the other hand, a BIR Ruling will be issued by the ITAD, signifying the denial of the application and explaining the legal and factual bases leading to the rejection of the application. For TTRA, the denial only removes the nonresident income recipient’s claim for refund on the transaction since the regular tax rates were already applied. In contrast, the withholding agent who applied for the preferential treaty rates under an RFC shall then be liable to pay deficiency taxes plus interest upon denial of the application. Nonetheless, all adverse rulings are appealable to the Department of Finance (DOF) within thirty (30) days from receipt thereof, pursuant to existing rules and regulations.
The overall process of the applications may be tedious to some, albeit gratifying as it aids the taxpayer in avoiding double taxation or alleviating some of the tax burdens usually implied in regular transactions. The tax treaties remain within grasp for duly entitled personnel and corporations to relish, provided the applicant honors the application procedures and requirements. If knowledge is powerful for those who use it, then tax treaty benefits can only be useful for those taxpayers who are aware of them. As nations move forward towards continuous progress, I leave you with another quote from J. Robert Oppenheimer – “The peoples of this world must unite, or they will perish.”
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.
As published in BusinessWorld, dated 08 August 2023