The fundamentals of tax residency certificate issuance

Those who are familiar with tax treaty provisions know that they apply only to residents of countries which are parties to the treaty. Thus, the main documentary requirement to support eligibility for tax treaty relief is the proof of residency of the non-resident income-earner. More commonly known as a tax residency certificate (TRC), such proof of residency is a certification issued by the tax authority of the country of the income-earner, attesting that the latter is a resident of such country in the tax year concerned for purposes of the tax treaty being invoked.

On 22 October, Revenue Memorandum Order (RMO) No. 51-2019 was issued by the Bureau of Internal Revenue (BIR) to regulate the issuance of TRCs, preventing their misuse or abuse. In retrospect, the BIR noted that resident aliens and resident foreign corporations had been applying for TRCs for tax treaty purposes so as not to be taxed on their income derived from another State and submitting spurious contracts with foreign income payors to conceal the true nature of their transactions.

The RMO aims to monitor not only Philippine residents with foreign-sourced income by creating a database of taxpayers in that category, but also seeks to ensure that such income is properly reported for tax purposes.

Where can a TRC application be filed? Under Revenue Administrative Order 1-2019 issued on 25 January, the International Tax Affairs Division (ITAD) is the only authorized office to receive and process TRC applications. Those filed with any office other than ITAD is deemed not filed.

Who are qualified to apply for a TRC application? According to the RMO, only Philippine residents, whether individuals or corporations, who are subject to full tax liability on their worldwide income are entitled to claim tax treaty benefits. Thus, only resident citizens and domestic corporations are considered rightful applicants for a TRC.

On the other hand, resident aliens and resident foreign corporations are considered residents for domestic tax purposes only. Thus, they may not apply for a TRC, and ITAD will no longer accept TRC applications filed by such resident foreigners.

The RMO reiterates the requirement for taxpayers who are engaged in trade or business, or practice of profession to be duly registered with the BIR under a regular Tax Identification Number (TIN). In case the taxpayer-applicant’s TIN was issued for One-Time Transactions (ONETT) or under Executive Order No. 98, such registration must be updated by filing BIR Form 1905. The registration update is not required for those applicants registered under EO 98 with passive income of any type or with pensions from foreign sources.

What is the procedure for a TRC application? TRC processing is initiated upon the taxpayer’s submission of a letter-request to ITAD. Similar to the initial processing of tax treaty relief applications, TRC applications are to be evaluated by the ITAD Officer of the Day (OD). If the submitted documents are incomplete, the OD will issue a Notice to Submit.

The sample Notice to Submit for corporations and individuals, as annexed to RMO 51-2019, indicates the required supporting documents of a TRC application, which includes a Special Power of Attorney or letter authorizing a representative of the applicant to file and claim the TRC.

The letter request must indicate if any of the required supporting documents are unavailable or inapplicable. All documents submitted must be a certified true copy of the original. In addition, the original copy must be presented for comparison and verification by ITAD.

ITAD will verify the information stated or declared in the application through the BIR’s Integrated Tax System. ITAD is mandated to act promptly and expeditiously on all TRC applications. Normal processing time for the issuance of TRCs has been set at 14 working days counted from the date of submission of the completed documents.

However, if the ITAD Case Officer finds the need for additional documents, on top of those required under RMO 51-2019, to properly evaluate the TRC application, the TRC applicant must be notified and given sufficient time to comply.

However, if based on the documents submitted by the applicant, ITAD finds that the issuance of a TRC is unwarranted, or that the documents submitted are fake, a letter of denial will be issued. Such denial stands unless and until the applicant declares the real nature of the transaction abroad and submits authentic documents.

What can taxpayers look forward to? With RMO 51-2019, ITAD will now act as the repository of documents substantiating the foreign-sourced income of Philippine taxpayers. It is likewise mandated to furnish a copy of all documents submitted by a TRC applicant to the appropriate Revenue District Office (RDO) or Large Taxpayers Division (LTD). This linkage between ITAD and RDO/LTD will enable the latter to verify if the correct taxes were paid on foreign-sourced income earned by Philippine residents and conduct a tax investigation if warranted.

RMO 51-2019 is a laudable development towards a more efficient and effective taxation system in the Philippines. As additional taxes start building up with more stringent collection measures in place, taxpayers equally expect strict observance of the rules protecting their right to the issuance of TRCs. Equitably, those qualified for relief should be issued TRCs, and those subject to tax for foreign-sourced income should be charged accordingly based on the right amount owed to the public coffers — no more, no less.