New RMO on Tax Treaty Relief Intent vs Impact

While everybody was busy anticipating developments on CREATE and a possible extension of the tax filing deadline given the re-imposition of the Enhanced Community Quarantine, the Bureau of Internal Revenue (BIR) pulled a rabbit out of the hat and issued Revenue Memorandum Order (RMO) No. 14-2021, providing updated procedures for availing of tax treaty benefits for nonresident foreign income earners.

The RMO cited the Supreme Court’s (SC) decision in the case of Deutsche Bank vs. CIR that a tax treaty relief application (TTRA) merely confirms a taxpayer’s entitlement to treaty benefits. However, it also clarified that the BIR may still require the filing of a TTRA to confirm eligibility for the benefits, provided that it does not unduly deprive the taxpayers of the intended benefits.

However, it also discontinues the Certificate of Residency for Tax Treaty Relief (CORTT) forms and imposes penalties for late filing.

Procedures
The RMO repealed previous issuances on TTRAs. Thus, the simpler requirement of submitting CORTT forms for royalties, dividends and interest income will no longer apply.

Under the new rules, if the nonresident has furnished the withholding agent with the necessary documents and treaty relief has been applied, the withholding agent shall file a request for confirmation of the treaty availment with the International Tax Affairs Division (ITAD). The request must be filed at any time after the payment of the withholding tax but not later than the last day of the fourth month following the close of each taxable year.

On the other hand, if regular tax rates have been applied, the nonresident income earner may file a TTRA at any time after receipt of the payment to prove entitlement to the treaty benefit.

A certification confirming entitlement to the benefits will be issued in lieu of the usual BIR ruling.

Documents and Annual update
Similar to the earlier rules, the request or TTRA should be supported by documents which include the application form and tax residency certificate issued by the foreign tax authority. New general requirements include proof of income payment and remittance of tax. Other specific documents are also required, depending on the transaction.

An application must be filed for every transaction. For long-term contracts (e.g., service and loan agreements, licensing contracts covering more than one year), annual updates are required until their termination. Thus, an updated application form and the supporting documents need to be filed within the prescribed period for each taxable year.

Processing time
The TTRAs shall be processed within four months from submission of complete documents. This is, however, contingent on ITAD resolving its current backlog, hence may not materialize for a good while.

Refund
Nonresidents subjected to the regular tax rates but have obtained confirmation of eligibility to the preferential rates may subsequently file a claim for refund with the proper BIR office within two years from payment.

Denial and appeal
If treaty rates were applied and the BIR deems that regular rates should apply, a ruling will be issued discussing the factual and legal bases for the denial. The local payor will be assessed for deficiency withholding taxes including penalties.

Nevertheless, taxpayers may file an appeal with the Department of Finance within 30 days from receipt of the denial.

Pending TTRAs and three-month window

Taxpayers with pending TTRAs covering income earned in 2020 and prior years (including those with Notice of Archiving) are granted three months from receipt of the Final Notice to Submit Additional Documents or from effectivity of the RMO, whichever is later, to submit all lacking documents. Failure to do so will result in automatic denial of the TTRA.

On the other hand, previously filed CORTT forms will be forwarded to the district offices for compliance check.

Intent vs Impact
RMO 14-2020 applies the classic “intent versus impact” principle. As to intention, the RMO is very clear — simpler and consistent procedures to confirm treaty benefits. As to impact, however, the new rules may result in more administrative burdens and leave taxpayers with more questions than answers.

For one, is the denial of treaty benefits for failure to strictly comply with filing and documentary requirements consistent with the principles articulated by the SC in the Deutsche case? Perhaps the BIR can consider not issuing denial rulings and instead just set aside incomplete applications. The onus is thus on the taxpayer to prove with valid and convincing evidence its entitlement to the benefits during an audit. The RMO admits to ITAD’s lack of manpower resources which also compounded the backlog. Perhaps it makes sense to spread the work by having the compliance check be done also through the normal tax audit process.

Based on experience, the request for additional documents not listed in the previous RMOs can come only years after the TTRA filing, and taxpayers face setbacks in securing archived and possibly lost documents. Considering that no similar parameter was provided in earlier rules, the three-month window under the new RMO would be prejudicial to taxpayers, especially during this time of quarantine.

The recurring filings for long-term contracts also unduly burden both taxpayers and the BIR with the additional requirements.

Given the options, withholding agents may be more inclined to apply the regular tax rates and pass the TTRA filing burden to the nonresidents. Apart from the TTRA filing, the foreign income earner will have to contend with overpaid taxes. Although the refund route is available, the process is time consuming and complicated and may end up costing more than the amount being recovered.

Moving into 2021, taxpayers had hoped for simpler requirements, even envisioned for CORTT-like procedures for all income payments. But RMO 14-2021 appears to provide no further relief. I hope that the BIR can put more trust in the good faith of taxpayers in their availment of treaty benefits and reconsider these updated guidelines. Again, I think the key might be to bank on revenue examiners to supplement the evaluation during the audit process by requesting specific but reasonable critical documents to prove a taxpayer’s eligibility for treaty relief. This shared responsibility would certainly help address the existing and future workload of ITAD and provide holistic relief to taxpayers.