Enforceability and applicability of tax treaties

Ordinarily overlooked, the Philippines is gradually drawing the attention and interest not only of its neighbors in the Asian region, but also of large economies in Europe, America and Africa. The government’s efforts to attract foreign investors to boost economic development is evident in numerous and concurrent reforms which are now in place and are being implemented to establish a reputation for the Philippines as a potential investment destination in the region. The country’s economic outlook has been positive and is expected to continue for years or even decades to come. Being dubbed as the “second miracle in Asia” as well as the recent upgrade in investment ratings issued by various internationl credit agencies, is welcome news and a testimony of how the Philippines is economically faring thus far. Are the policies and reforms in place consistent with the country’s aim to attract foreign investors or is it still necessary to revisit and revise established policies and procedures?

On separate dates, the Bureau of Internal Revenue (BIR) has issued Revenue Memorandum Circulars (RMCs) No. 16-2014 and 37-2014, both provide for the entry into force, effectivity and applicability of the Double Taxation Agreement of the Philippines with Nigeria and Kuwait, respectively. RMC No. 16-2014 states that the Philippine-Nigeria Double Taxation Agreement has entered into force on Aug. 18, 2013. On the other hand, RMC No. 37-2014 states that the Philippine-Kuwait Double Taxation Agreement has entered into force on April 22, 2014. Both RMCs provide that the provisions in the agreement on taxes on income would apply to income derived or which accrued beginning Jan. 1, 2014.

Generally, income of foreign investors, specifically non-resident foreign corporations (NRFC), is subject to an income tax rate of 30 percent. However, the National Internal Revenue Code (Tax Code) of 1997 provides that income earners may be exempt or may avail of the reduced or preferred rate pursuant to existing and applicable tax treaty agreements. At present, the BIR requires that in order to avail any tax treaty relief, income earners or its duly authorized representative must file a tax treaty relief application (TTRA) with the Internation Tax Affairs Division (ITAD). Failure to properly file a TTRA and to secure a favorable ruling from the ITAD will subject the NRFC’s income to regular tax rate of thirty (30) percent.

The latest issuance concerning TTRA is Revenue Memorandum Order (RMO) No. 72-2010, dated 25 August 2014, which provides for the guidelines on the processing of TTRAs pursuant to existing Philippine Tax Treaties.The Order was issued to streamline the processing of the application of tax treaty relief in order to improve efficiency and service to the taxpayers. It also aims to prevent the consequences of an erroneous interpretation and/or application of the treaty provisions.

A contentious provision, Section 14 of RMO No. 72-2010, provides that the filing of a TTRA must be made before the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable transaction. Failure to properly file the TTRA with ITAD within the period prescribed shall have the effect of disqualifying the TTRA under RMO No. 72-2010.   

In the case of Deutsche Bank vs. Commissioner of Internal Revenue (GR No. 188550, 19 August 2013), the issue involved was whether the failure to strictly comply with RMO No. 1-2000, now RMO No. 72-2010, regarding the application for a tax treaty releif will automatically deprive persons or corporations of the benefit of a tax treaty. In this case, the petitioner alleged that it had erroneously overpaid branch profit remittance tax at fifteen (15) percent for year 2002 and prior years. Believing that there was overpayment, petitioner filed an administrative claim for refund or the issuance of a tax credit certificate. On the same date, petitioner filed with the ITAD a TTRA where petitioner claimed that it is entitled to the preferential tax rate of ten (10) percent under the Philippine-Germany Tax Treaty. In this case, the Court of Tax Appeals ruled that the TTRA was filed after the taxable transaction; hence, the petitioner failed to comply with the requirement of RMO No. 1-2000. The Supreme Court ruled granting the tax treaty relief to the petitioner Deutsche Bank and ordering respondent Commissioner of Internal Revenue to refund or issue a tax credit certificate in favor of petitioner Deutsche Bank.

The Supreme Court rationalized that the outright denial of the tax treaty relief for failure to strictly comply with the prescribed period as required in RMO No. 1-2000 is not in harmony with the objectives of the contracting state to ensure that the benefits granted under tax treaties are enjoyed by duly entitled persons or corporations. The Supreme Court further stated that the BIR must not impose additional requirements for the availment of the benefits under existing bilateral/international agreements. Finally, the Supreme Court stated that international agreements or treaties have the force and effect of law; hence must be enforced as such. At most, the application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief.

The primordial question now is the enforceability and application not only of tax treaties of the Philippines with Kuwait and Nigeria but also of all existing tax treaties with other countries. Essentially, in light of the abovementioned Supreme Court ruling, whether existing tax treaties will automatically entitle income earners to the benefits under existing tax agreement without the need to comply with any condition precedent set forth in RMO No. 1-2000, now RMO 72-2010.

Phillip M. Torres is a Supervisor from the Tax Group of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The view and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or RGM&Co. For comments or inquiries, please email [email protected] or [email protected].

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