(Conclusion)
Tax treaties generally provide for exemption from Capital Gains Tax (CGT) on the part of the seller, whose home country has a treaty with the Philippines, subject to the condition that the requirements under the tax treaty are complied with.
As the transaction is subject to CGT, and not withholding tax, how will the parties be able to comply with the requirement of submitting the withholding tax return and proof of payment of withholding tax? In addition, the parties may agree that payment of the selling price for the shares will be done only after fulfillment of certain milestones or conditions. Hence, while a deed of sale may already be executed, it does not always follow that payment has been remitted. In this case, how will the parties be able to comply with the requirement of submitting the proof of payment? Or does this mean that we should interpret the RMO to mean that only those documentary requirements that are applicable should be submitted?
In the case of business profits, there is now a specific requirement to submit a Bureau of Immigration certification specifying the dates of arrival and departure from the Philippines of individuals rendering services within the Philippines on behalf of the non-resident, a certificate of completion of the project signed by the recipient and withholding agent/payor, and invoices issued by the income recipient.
In the case of interest, there is now a specific requirement to submit proof that the interest rate is at arm’s length if the debtor and creditor are related parties.
Does this mean that taxpayers who entered into a loan agreement with non-resident related parties are now required to prepare Transfer Pricing Documentation (TPD) to prove that the interest is at arm’s length? If yes, will it not run counter to the provisions of Revenue Regulations (RR) 34-2020 and Revenue Memorandum Circular (RMC) 54-2021, which made TPD mandatory only in the case of taxpayers who are required to file a BIR form 1709 or the Related Party Transactions form, and provided that the related party transaction meets certain thresholds?
For capital gains, there is now a specific requirement to submit an interim audited financial statement (AFS) as of the date of the transfer. However, the RMO is silent on whose AFS should be submitted. Is it possible that the RMO is referring to the AFS of the Philippine company whose shares are being sold? If yes, this may present an additional cost to the transacting parties or to the Philippine company whose shares are being sold or transferred. Further, the willingness of the Philippine company whose shares are being sold or transferred, to have its interim financial statements be audited will play a critical role because, otherwise, the seller and the buyer will not be able to submit the interim AFS.
If the Philippine company, for one reason or another, cannot have its interim financial statements audited in time, this may hamper or restrict the freedom of the parties – the seller and the buyer – to transact with each other. This may not pose a problem if the Philippine company, is a wholly owned subsidiary or if the seller exercises significant control over the Philippine company. But in cases when the seller has no significant control over or only owns a minimum number of shares in the Philippine company, this may become a point of contention. In the latter case, what will be the authority of the seller to require the Philippine company to prepare an interim AFS?
As RMO 14-2021 is new, it can be expected that there will be various questions surrounding it. It will be a welcome development if the tax authorities will issue further clarifications on the requirements. In the meantime, withholding agents and taxpayers availing of treaty relief should be mindful of this RMO as failure to submit a documentary requirement may lead to the denial of the request for confirmation or TTRA.
Laurice Claire C. Penamante is an assistant manager from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.
This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email ph-inquiry@kpmg.com or rgmanabat@kpmg.com.