New guidelines on tax treaty relief: a welcome break for taxpayers?

New guidelines on tax treaty relief: a welcome break for taxpayers?

To simplify the process in securing tax treaty relief from the Bureau of Internal Revenue, new guidelines were recently issued by the tax authorities through Revenue Memorandum Order No. 72-2010. This issuance was supposedly aimed to improve efficiency and service to taxpayers by tax authorities.

Reading the issuance would show that the new guidelines have made significant change on the process of tax treaty relief application. The changes started with the introduction of separate application form for every type of income. Unlike before where taxpayer merely use one BIR form for all tax treaty relief applications, there is now a prescribed application form for each particular type of income. If a taxpayer is therefore applying for treaty relief for two or more income types, then applications forms prescribed for subject incomes should all then be filed.

The new rules likewise mentioned specifically the documentary requirements for each income. However, all tax treaty relief applications need to satisfy the following general requirements:

1)      Proof of residency of income earner

2)      Articles of Incorporation of the income earner

3)      Special Power of Attorney executed by the income earner in favor of the withholding agent if it’s the filer of the application. On the other hand, if the filer is only the local representative of the withholding agent, then there must also be an authorization duly executed by the withholding agent in favor of the filer

4)      Certification of the business presence in the country

5)      Certificate of no pending case

A notable change on guidelines is the requirement that the filing of application for tax treaty relief should be made before the transaction. For this purpose, “transaction” shall mean before the occurrence of the first taxable event. It is further provided under the issuance that failure to file the relief application within the prescribed period which is “before the transaction” will result to disqualification of such application. 

The new filing period is a departure from the earlier requirement under Revenue Memorandum Order 1-2000 which requires that any availment of the tax treaty relief shall be preceded by an application by filing the same at least fifteen (15) days before the transaction.

Though the new prescribed filing period leans in favor of taxpayers, the requirement that the filing of application should be made before the first taxable event is confusing and may be interpreted against the taxpayers. Could it mean that for every dividend declaration or interest payment, there should be a separate application? Further, what would happen to contracts executed before imposing this relief application a mandatory requirement and these contracts are still existing or enforced by parties? Are taxpayers involved in these contracts will now be barred from filing a relief application since it is made after the “transaction”?  

As much as we applaud the objectives of both issuances, Revenue Memorandum Orders No. 01-2000 and 72-2010, which are streamlining the process of tax treaty relief to avert erroneous interpretation of treaty provisions, mandating such application for every payment/declaration, may defeat the purpose of issuances. It may produce an adverse result such as clogging of pending applications.

Moreover, there is no remedy offered under the new guidelines to those taxpayers disqualified for filing an application for failure to apply a treaty relief before the “first taxable event”? These taxpayers have the right to avail the preferential tax rates under treaties. As such, they should not be deprived of such tax rates for mere failure to file the application prior to the first taxable event. Tax authorities should not strictly implement this requirement of filing before the ““first taxable event” and still allow/qualify these taxpayers to file their application.

Another interesting provision of Revenue Memorandum Order No. 72-2010 is the allowed period for the tax authorities to process and issue the rulings. It is provided that within seven (7) working days from the actual receipt of the application, the tax authorities shall notify the filer of lacking documentary requirements and the filer has fifteen (15) days to comply the same. Also, under the issuance, the ruling must be available for release after sixty (60) working days from the date of receipt of application or from the date the complete documentary requirements are submitted, whichever comes later.

These prescribed periods for tax authorities to process and  issue the ruling, are being observed only for newly filed applications; although we have yet to see the actual issuance of a ruling within the prescribed period. Those applications which have long been pending before the issuance of Revenue Memorandum No. 72-2010, will remain pending being the last priority for processing and release. An option to refile such application to be treated among those filed during the implementation of Revenue Memorandum No. 72-2010 is not even possible since it would mean filing beyond the transaction. The new guidelines would therefore not be a welcome break to all taxpayers specially those whose request have been pending with the tax office for quite some time.

Clearly, applying these prescribed periods to newly filed application would be beneficial only to some applications but it would not still serve the purpose of the issuance which is streamlining the process and improving efficiency and service to taxpayers. The only way to effectively attain this objective is not to make the application for tax treaty relief a mandatory requirement.