The mechanism of tax sparing allows a state to grant tax relief (hence, taxes are spared ) to nonresident foreign corporations (NRFC) to attract capital inflows that contribute to economic growth. Under our Tax Code, an NRFC may avail of the reduced 15% tax rate on dividend income coming from the Philippines if its country of domicile allows a credit against the 15% tax that was spared or fictionally paid at the source. On the other hand, various tax treaties entered into by the Philippines also grant reduced rates to foreign shareholders residing in those treaty countries.
In 2020, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Order (RMO) No. 46-2020, which lays down the guidelines and procedures for tax sparing applications (TSAs). A few months later, RMO No. 14-2021, on availing of treaty benefits, laid down updated procedures for tax treaty relief applications (TTRAs) and introduced requests for confirmation (RFC) for those who outright apply the exemption or preferential rate. Recently, the BIR issued Revenue Memorandum Circular (RMC) No. 77-2021, clarifying certain provisions of RMO 14-2021.
To be candid, while these issuances purport to streamline the process and documentary requirements, they have in fact made the documentary requirements more comprehensive, and have just reformatted the certification/ruling that the taxpayer would get in response to the application/ruling request. There are a couple of things that I think benefit taxpayers in the updated guidelines. For one, they have made the documentary requirements uniform and clear from the start, and this should make the processing more efficient since it helps avoid a lot of back and forth when case officers impose different requirements and much later on in the process. Further, the BIR has committed to process TTRAs within four months from submission of complete documents or as soon as practicable, provided the backlog is addressed at the International Tax Affairs Division (ITAD) where the applications (TSAs, TTRAs, and RFCs) are lodged. It is my hope that this comes true sooner rather than later.
Now comes RMC 20-2022, a collective guideline simplifying certain matters as regards the filing of RFCs/TTRAs, and TSAs. Perhaps to alleviate the volume of applications filed with ITAD, the BIR clarified that the need to file separate applications for subsequent or future income payments would depend on the tenor of the COE if one has already been issued.
For recurring transactions, the COE would indicate the requirements for compliance if continuous entitlement to reduced tax rates is warranted using the same COE. Thus, if no such requisites are stated in the COE, a separate RFC/TTRA, or TSA must be filed with ITAD for subsequent similar transactions.
RMC 20-2022 has also brought to light the importance of the COE if one is already issued. During tax audits by the BIR, the taxpayer should present the COE to shield the income payments from any tax issues that may arise and show proof that the requisites cited in the COE had been satisfied. On its part, the BIR examiner is duty-bound to ensure that the documents submitted are authentic, for which ITAD may assist in case there is doubt.
For long-term contract of services where annual updating is required, RMC 20-2022 has provided the specific documents which must be submitted to the BIR as follows: (1) tax residency certificate of the nonresident income recipient for the relevant year; (2) sworn certification (a sample was annexed to the issuance) stating the services provided by the foreign enterprise, the place where the services are performed, individuals who rendered the services on behalf of the foreign enterprise, their positions or designations and professional background and duration of stay of such individuals in the Philippines; and, (3) certified true copy of the passports of such personnel or a certification duly issued by the Bureau of Immigration stating the dates of arrival in and departure from the Philippines.
The following documents must also be submitted, if applicable: (a) Certificate of Completion of the project duly executed by the income recipient and duly accepted by the domestic income payor; (b) invoice/s duly issued by the income recipient in accordance with the invoicing requirements of the country of its residence; and (c) evidence of payment or remittance of income such as bank documents or certificates of deposit or telegraphic transfer/telex/money transfer.
RMC 20-2022 puts both the BIR and the filers of RFCs, TTRAs, and TSAs in a win-win situation. On one end, the BIR may have realized that it is in the government’s interest to preclude repetitive applications for transactions involving the same parties and circumstances. In this way, the tax office can expedite TTRAs and TSAs which have been pending over the years. To me, this is where the streamlining has actually, finally, come in. Consequently, the BIR may be able to achieve the promise of RMO 14-2021 to dispose of RFCs and TTRAs within four months from the date of submission of complete requirements. On this note, I hope that the BIR would also commit to a specific processing period for TSAs.
And on the other end of the stick are the filers of RFCs, TTRAs, and TSAs who could very well consider that waiting time defeats cost efficiency. Issuances such as RMO 20-2022 with all its noble intentions are very attractive to those who believe that our country is worth investing in, but only if the mechanisms on which our government operates are practical, reasonable, and efficient.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co.
Elizabeth K. Adaoag-Belarmino is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
