A foreign entity may invest in another country in the form of securities, bonds and the like.
Under the Tax Code, securities refer to shares of stock in a corporation and rights to subscribe for or to receive such shares. This term also includes bonds, debentures, notes or certificates, or other evidence of indebtedness, issued by any corporation, including those issued by a government or political subdivision thereof, with interest coupons or in registered form. As these are investments, they typically earn income, such as interest income.
How then is the interest income derived from these types of investments treated for tax purposes in
the Philippines?
Generally, interest paid to a nonresident foreign corporation (NRFC) is subject to 25-percent final withholding tax (FWT) or 20-percent FWT if the interest arises from a foreign loan. The FWT rate may even be reduced or exempted under an applicable tax treaty, subject to compliance with treaty conditions and administrative requirements to avail of treaty benefits.
In a recent Court of Tax Appeals (CTA) decision, a corporation established in the Netherlands invested in Philippine treasury bonds (T-bonds) issued by the Bureau of Treasury (BTr). Upon payment of the bonds, the interest income was subject to a 20-percent FWT pursuant to Section 28(B)(5)(a) of the Tax Code.
Claiming that the 20 percentFWT was erroneously withheld on the interest income it earned upon payment of the T-bonds, the NRFC filed an administrative claim for refund or issuance of a tax credit certificate. The NRFC based its claim on Section 32(B)(5) of the Tax Code in relation to Article 11(3)(a) of the Philippines-Netherlands Tax Treaty (PH-NL Tax Treaty).
Under the Tax Code, income of any kind, to the extent required by any treaty obligation binding upon the government of the Philippines, is excluded from gross income.
On the other hand, under the PH-NL Tax Treaty, it is stipulated that interest arising in either the Philippines or Netherlands and paid in respect of a bond, debenture, or other similar obligation of the government of that State or of a political subdivision or local authority thereof shall be exempt from tax.
The CTA held that pursuant to the Tax Code and the PH-NL Tax Treaty, income earned from treasury bonds is exempt from taxes. Hence, any tax paid in relation to said interest income is deemed erroneously paid and may be subject of a refund claim.
As it is a common dilemma for NRFCs that the recognition of the preferential rate under the tax treaty happens after FWT is already withheld on the interest income, the NRFC may subsequently file a claim for refund of the difference between the amount of FWT actually paid in the Philippines and the amount of FWT that should have been paid under the treaty after obtaining a certificate confirming their entitlement to treaty benefits. In line with this, it was also discussed by the CTA that under Section 2.58.3 of Revenue Regulations 02-98, as amended, the claimant should be able to establish among others, the fact of withholding by providing a copy of the withholding tax statement duly issued by the payor to the payee, showing the amount paid and the amount of tax withheld therefrom.
In this case, the NRFC presented the (1) BTr Statements of Taxes Withheld on the Coupon Due on the T-bond; (2) BTr Journal Entry Vouchers; (3) Certificates of Final Tax Withheld at Source (BIR Form No. 2306); and (4) Certificate from the Revenue Accounting Division of the BIR.
While the BIR argued that the abovementioned documentary proofs were insufficient to prove the fact of withholding, the CTA ruled otherwise and held that the documents were sufficient to prove this point.
It is noteworthy that tax refunds are construed strictly against the taxpayer, and in case of nonresident income earners such as an NRFC, the burden of proof falls on them to prove the entitlement to the tax being refunded.
As such, investors and their agents should be keen to ensure that the chain of investment and documents supporting the investment as well as the applicable taxes withheld therefrom are strictly monitored and substantiated as these may come handy in the future, e.g., in case of refund claims.
Julpha Clarisse Policina is a Supervisor under the Tax Group of R.G. Manabat & Co., a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The firm has been recognized as a Tier 1 in Transfer Pricing Practice and in General Corporate Tax Practice by the International Tax Review. For more information, you may reach out to Julpha Clarisse Policina or Mary Karen Quizon-Sakkam through ph-kpmgmla@kpmg.com, social media or visit www.home.kpmg/ph.