Clarifications on the revised guidelines and procedures for availing tax treaty benefits
(Revenue Memorandum Circular No. 77-2021 issued on June 15, 2021)
This Tax Alert is issued to inform all concerned taxpayers on the significant clarifications on the revised guidelines and procedures for availing tax treaty benefits provided under Revenue Memorandum Order (RMO) No. 14-2021.
Under RMO No. 14-2021, a request for confirmation or tax treaty relief application shall apply to all income derived by nonresidents from Philippine sources that may be entitled to relief from double taxation under relevant tax treaties. The submission of Certificate of Residence for Treaty Relief (CORTT) Form for dividends, interest and royalties shall be discontinued.
Availment of treaty benefits
1. If the nonresident submitted to the income payor a Tax Residency Certificate (TRC) and the appropriate BIR Form No. 0901 prior to the payment of income, the income payor may apply the provisions of the applicable treaty, provided that all the conditions for the availment thereof under the treaty have been satisfied. Otherwise, the regular rates imposed under the Tax Code should be applied by the withholding agent.
2. If the nonresident’s income was not subjected to tax in the Philippines pursuant to the tax treaty, the withholding agent/income payor shall file with ITAD a request for confirmation that the tax treatment of such income was proper.
Filing of Request for Confirmation (RFC) by income payor or TTRA by the non-resident income payee
1. The income payor should file the RFC. However, the income payor is not prevented from authorizing the non-resident or any other person to file the RFC on its behalf, provided the latter is equipped with a Special Power of Attorney (SPA).
2. The RFC, with complete documentary requirements, shall be filed on or before the dates prescribed below:
3. One consolidated RFC per nonresident income recipient, regardless of the number and type of income payments made during the year, shall be filed.
4. For long-term contracts involving the payment of interests and royalties and other types of income where the condition for entitlement to treaty benefits is not dependent on time threshold, annual updating is not mandatory. However, the withholding agent should ensure that the nonresident continues to be a resident of the same country for the whole duration of the contract by requiring the nonresident an updated TRC.
5. If there would be material changes in the facts or circumstances upon which the previous ruling was based in the succeeding year, an RFC shall again be filed by the withholding agent.
6. In the case of long-term contract of services where the existence of a permanent establishment (PE) in the Philippines is dependent on time threshold, the annual updating is mandatory.
7. If the RFC or TTRA is approved, the BIR will issue a Certificate of Entitlement (COE) instead of the usual BIR Ruling. The COE will still contain the material facts of the case and a ruling confirming the nonresident’s entitlement to treaty benefit.
Documentary requirements
1. The general requirements as provided under RMO 14-2021 shall be submitted only whenever applicable. Thus, if an expense has not yet been paid but has already been accrued in the books of the withholding agent, the proof of remittance is apparently not required to be submitted.
2. Non-residents need not re-submit a TRC to the income payor each time an income is earned. Only one original and authenticated TRC shall be submitted per year.
Alternatively, a certified true copy of the original may be submitted to other payors of income if the original copy is no longer available, with a notation as to whom the original copy was previously submitted.
The same rule also applies to the proof of establishment or incorporation, Certificate of Non-Registration or License to Do Business in the Philippines duly issued by the SEC, and Certificate of Business Registration/ Presence duly issued by the DTI.
3. All filers, other than the nonresident income recipient or withholding agent, shall present a notarized SPA when filing an application with ITAD.
4. To prove that an income is not effectively connected with a PE, if any in the Philippines, the foreign enterprise may submit the audited financial statements of the PE. If the same is not yet available at the time of filing, it may submit a Sworn Certification signed by a principal officer of the PE, which shall contain material facts that may lead the BIR to believe that the income is not effectively connected with the PE and that the PE is not material to the realization of such income.
5. For capital gains, an audited interim FS shall be used to compute the real property interest of the issuing domestic corporation at the time of the transaction. In the alternative, the following may be submitted: 1) unaudited interim FS; and 2) lapsing schedule as of the date of transfer or alienation of property.
6. For dividends, a certified true copy of the AFS as of the taxable year immediately preceding the date of declaration, which was duly filed with the BIR and SEC, shall accompany the application for RFC or TTRA.
7. The following documents are also required for redemption or buy-back of common shares: 1) notarized Board of Directors’ resolution authorizing the redemption or buy-back of shares; and 2) Articles of Incorporation and By-Laws of the issuing corporation.
8. When the tax authority of the United States of America (US) confirms that a trust arrangement is fiscally transparent and that the income of such trust is attributed to the beneficiaries who are all residents of that State pursuant to the TRC issued by the tax authority in US, such beneficiaries are no longer required to submit individual TRCs.
9. Applications with incomplete documents will not be accepted by ITAD.
10. In meritorious cases, the nonresident or withholding agent may be granted an extension within which to submit the required documents but in no case shall it exceed thirty (30) day
Transfer Pricing Documentation
1. For interest imposed on a loan or debt-claims between related parties, the best proof of arm’s length transfer prices for such controlled transactions is the transfer pricing documentation (TPD) of the nonresident creditor. In the event that a full TPD is not available, the nonresident may prove, through its Transfer Pricing Policy for Intercompany Loans or any equivalent transfer pricing study, that the interest rate imposed on the loan or debt-claim is arm’s length.
Penalties and transitory provisions
1. There will be no automatic denial for failure of the filer to file RFC/TTRA within the prescribed period. However, the penalty for late filing shall be imposed.
2. Nonresident who has income in 2020 and prior years subjected to treaty rates, but no TTRA or Certificate of Residence for Tax Treaty Relief (CORTT) Form was filed therefor, the withholding agent has until the last working day of this year to file an RFC with complete documentary requirements. Failure to file the same within the prescribed deadline would be subject to administrative penalties under Sections 250 and 255 of the Tax Code. Moreover, a penalty of P1,000 per failure to file a CORTT Form for dividends, interests and royalties paid after the effectivity of RMO No. 8-2017 until December 31, 2020 shall be imposed.
3. All taxpayers with pending TTRAs will still receive a “Final Notice to Submit Additional Documents” and will be given three (3) months from receipt thereof to submit the required documents. Those who have been notified that their applications have been archived will no longer receive a Final Notice but are obliged to submit the required documents indicated in the previous notice/s within four (4) months from the effectivity of the new RMO.
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