News and developments
Philippines: BIR Updates its Procedures for Claiming Tax Treaty Benefits
Scope of Memorandum
The Memorandum covers Philippine-sourced income derived by non-resident taxpayers from the Philippines, which are entitled to relief from double taxation under a relevant tax treaty. In addition to streamlining the procedures in availing tax treaty benefits, the Memorandum:- reformats the manner of confirming entitlement to tax treaty benefits;
- addresses pending applications for income earned in previous years; and
- prescribes penalties for the late filing of the relevant applications.
Administrative guidelines
The BIR requires that, prior to the first income payment, non-resident taxpayers submit:- an application form that cites the relevant provision of the tax treaty; and
- a tax residency certificate with the withholding agent or income payor.
Treatment of long-term contracts
The Memorandum order generally mandates only one request or application for each transaction. However, for long-term contracts (ie, effective for more than one year), the withholding agent or non-resident taxpayer is required to update the BIR annually by filing the following documents no later than the last day of the fourth month that follows the close of each taxable year:- an updated application form;
- a newly issued tax residency certificate (if any); and
- other relevant documents.
Resolution of request or application
The BIR will issue a certificate of entitlement (COE) to tax treaty benefits if the request for confirmation or application for tax treaty relief is approved. There are two types of COE:- for recurring transactions (applicable to income such as dividends, branch profit remittances, interest and royalties); and
- for a particular transaction or for a period of engagement (applicable to business profits, capital gains and income from services).
Recurring transactions
In February 2022, the BIR issued Revenue Memorandum Circular No. 20-2022 to clarify that taxpayers that were already issued COEs for recurring transactions no longer need to file a request for confirmation or application for tax treaty relief every time income of a similar nature is paid to the same non-resident taxpayer. This is intended to decrease the volume of applications filed with and processed by the BIR as it was observed that more than 50% of the requests filed with it deal with recurring transactions. However, the withholding agent or income payor must still comply with the requisites mentioned in the COE every time a payment is made to the non-resident. If the requirements set out in the COE issued by the BIR are not present (eg, because there is a change in the tax residence), the taxpayer must file a new request for confirmation or application for tax treaty relief.Requirement period for tax treaty benefit requirement
In the Philippines, the requirement period for tax treaty benefit entitlement has been an issue between different government agencies. While the BIR has previously limited the period to file an application for tax treaty relief to 15 days before each transaction, the Supreme Court has decreed that the outright denial of a tax treaty relief for failure to strictly comply with the prescribed period does not harmonise with tax treaty objectives. According to the Court, an application merely confirms a taxpayer's entitlement to tax treaty benefits and cannot unduly divest a taxpayer of his right to claim such benefits. The updated guidelines for claiming tax treaty relief are intended to comply with the Court's interpretation. The updated guidelines also provide taxpayers with certainty regarding their tax treatment by expediting the process of their application, despite constraints on the volume of work, a limited number of personnel and the requirement for thorough evaluation of each application.Authored by: John Christian Joy A. Regalado