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Double Taxation Agreement (DTA) (1101) in the Philippines
Income And Business Taxation (BMGT 25)
Cavite State University
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11. Double taxation agreement
TAXATION
DOUBLE TAXATION AGREEMENTS (DTA) (1101)
Double Taxation Agreements (DTA) Nature and Purpose of DTAs
a) Avoidance of double taxation b) Prevention of fiscal evasion with respect to taxes on income
Manner of Giving Relief from Double Taxation
In order to eliminate double taxation, a tax treaty resorts to several methods.
First, it sets out the respective rights to tax of the state of source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred and one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of source is unlimited.
The second method for the elimination of double taxation applies whenever the state of source is given a full or limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state of residence to allow relief in order to avoid double taxation. There are two methods of relief the exemption method and the credit method. In the exemption method, the income or capital which is taxable in the state of source or situs is exempted in the state of residence, although in some instances it may be taken into account in determining the rate of tax applicable to the taxpayer's remaining income or capital. On the other hand, in the credit method, although the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter. The basic difference between the two methods is that in the exemption method, the focus is on the income or capital itself, whereas the credit method focuses upon the tax. Procedure for Availment of Tax Treaty Benefits
The taxpayer must secure a ruling from the Bureau of Internal Revenue (BIR) through the International Tax Affairs Division (ITAD) that he may avail himself of preferential rates under existing tax treaties
Under RMO 1-2000, taxpayers who wish to avail themselves of tax- treaty relief should accomplish BIR Form 0901- Application for Relief from Double Taxation-and file the same together with the supporting documents to the ITAD at least 15 days before the transaction, l., payment of royalties, dividends, etc. RMO 1-2000, however, does not specify the types of documents needed to support an application for tax-treaty relief.
Tax Treaty Relief Application
Notes: Thus, BIR Form No. 0901 [Application for Relief from Double Taxation] prescribed under RMO 1-2000 and BIR Form No. 1928 [Gains from Sale or Transfer of Shares of Stock in Philippine Corporation] prescribed under RMO 30-2002 are hereby superseded.
The following Tax Treaty Relief Applications (TTRAs) forms shall henceforth be adopted to implement this RMO:
In Case of Conflict Between Tax Treaty and Domestic Laws a) As a general rule, the provisions of the Philippine Tax Code (domestic law) shall apply on the income, gain or profit of any person liable to income tax. b) In case of conflict between the provisions of a tax treaty and domestic law the provisions of the tax treaty generally prevail over the provisions of the domestic law. c) Where the rate of tax imposed under the domestic law is lower than the rate imposed under the tax treaty, the lower tax rate under the domestic law prevail.
General Documentary Requirements.
Form No. Purpose BIR Form No. 0901 -P For Business Profits BIR Form No. 0901 -T For Profits from Shipping and Air Transport BIR Form No. 0901-D For Dividend Income BIR Form No. 0901 -I For Interest Income BIR Form No. 0901 -R For Royalty Income BIR Form No. 0901 -C For Capital Gains BIR Form No. 0901 -S For Income from Services BIR Form No. 0901 -O For Other Income Earnings
11. Double taxation agreement
(RM0 72 -2010):
SEC. 3 The following documents are the general documentary requirements which shall be attached to all duly accomplished TTRAs (3 copies) which must be signed by the applicant who may either be the income earner or the duly authorized representative of the income earner , pursuant to existing Philippine tax treaties:
Business Profits The following documents shall be submitted in addition to documents required under Section 3 hereof together with three (3) copies of duly accomplished BIR Form No. 0901 -P when the “Business Profits” Article in relation to the “Permanent
Establishment” Article of the appropriate tax treaty is being invoked, viz :
1. Proof of Residency
Original copy of a consularized certification issued by the tax authority of the country of the income earner to the effect that such income earner is a resident of such country for purposes of the tax treaty being invoked in the tax year concerned.
2. Articles of Incorporation (For income earner other than an individual)
Photocopy of the Articles of Incorporation (AOI) (or equivalent Fact of Establishment/Creation/Organization) of the income earner with the original copy of a consularized certification from the issuing agency, office or authority that the copy of Articles of Incorporation (AOI) (or equivalent Fact of Establishment/Creation/Organization) is a faithful reproduction or photocopy.
3. Special Power of Attorney
a. If applicant/filer is the withholding agent of the income earner or the local representative in the Philippines of the income earner – - Original copy of a consularized Special Power of Attorney ( SPA) or a consularized written authorization duly executed by the income earner authorizing its withholding agent or local representative in the Philippines to file tax treaty relief application.
b. If applicant/filer is the local representative of the withholding agent of the income earner - Original copy of a consularized Special Power of Attorney (SPA) or a consularized written authorization duly executed by the income earner authorizing its withholding agent or local representative in the Philippines to file tax treaty relief application; and - Original copy of Letter of Authorization from the withholding agent authorizing the local representative to file the tax treaty relief application.
4. Certification of Business Presence in the Philippines
a. For Corporation or Partnership
- Original copy of a certification from the Philippine Securities and Exchange Commission that the income earner is or is not registered to engage in business in the Philippines.
b. For an Individual
- Original copy of a certification from the Department of Trade and Industry that the income earner is or is not registered to engage in business in the Philippines.
5. Certificate of No Pending Case
- Original copy of a sworn statement providing information on whether the issue(s) or transaction involving directly or indirectly the same taxpayer(s) which is/are the subject of the request for ruling is/are under investigation; covered by an on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or subject of a judicial appeal.
11. Double taxation agreement
the foreign loan.
d. Board of Investments (BOI) Registration, if applicable Certified copy of Board of Investments registration of the payor of the interest, including a Sworn Statement that such registration has not been cancelled at the time of the transaction.
e. Proof of Loan Guarantee Certified copy of proof of loan guarantee or insurance, or a certification of financing (direct or indirect) by the foreign government or any financial institution wholly owned by the foreign government or any financial institution designated in the treaty, if applicable.
f. Fact of Establishment (for the guarantor/insurer), if applicable. Certified copy of documents establishing the foreign government owned financial institution which guaranteed or insured the subject loan on instances when the name of the financial institution is now different (i. instances of change in name) from the name indicated in the tax treaty being invoked.
- If Interest Earnings are from Investments or Deposits:
Original copy of Bank Certification attesting to the nature/type and presence of investments/deposits on said bank including the date the investments/accounts were placed/opened.
Royalties The following documents shall be submitted in addition to the documents required under Section 3 hereof together with three (3) copies of duly accomplished BIR Form No. 0901-R when the “Royalties” Article of the appropriate tax treaty is being invoked, viz :
1. Original or certified copy of the duly notarized Royalty Agreement,
Technology Transfer Agreement, or Licensing Agreement.
2. When applicable,
a. Certified copy of Board of Investments registration of the payor of
the royalties, including a Sworn Statement that such registration has not been cancelled at the time of the transaction.
b. A certified copy of the registration of the payor of the income or
withholding agent with the Philippine Economic Zone Authority (PEZA) of the payor of the royalties including a Sworn Statement that such registration has not been cancelled at the time of the transaction.
c. Certified copy of Intellectual Property Office (IPO) registration.
Capital gains Applications for relief from double taxation on gains from sale or transfer or shares of stock in a Philippine Corporation as to the fees, are still covered by Revenue Memorandum Order No. 30-2002 dated November 4, 2002. The following document shall be submitted in addition to the documents required under Section 3 hereof together with three (3) copies of duly accomplished BIR Form No. 0901-C when the “ Capital Gains ” Article of the appropriate tax treaty is being invoked, viz :
a. Contract Original or certified copy of the notarized Deed of Absolute Sale or notarized Deed or Contract e. Deed of Assignment, which actually transfers the ownership of the subject shares of stock. b. Stock Certificates
Certified copy of the Stock Certificate's or Subscription Contract covering the subject shares of stock
c. General Information Sheet
Certified copy of the General Information Sheet (GIS) filed with the SEC, showing the name of the subscriber (when shares are not yet fully paid and as a consequence, stock certificates have not been issued).
11. Double taxation agreement
d. Corporate Secretary Certificate
Original copy of the duly notarized certificate executed by the Corporate Secretary of the Philippine corporation whose shares of stock were sold showing the following information:
a. number and value of the subject shares
of the seller as of the date of sale;
b. seller’s percentage of ownership as of the
date of sale;
c. acquisition date(s) of the subject shares;
d. mode of acquisition of the subject
shares, including dates of previous transfers and parties involved in said transfers; and
e. buyer’s percentage of ownership after the
transfer of the subject shares.
e. Comparative Schedule of Comparative Schedule of Property, Plant & Equipment
Original copy of the comparative schedule duly certified by a responsible officer 1 of the Philippine corporation, of the “real property or real property interest's” of the domestic corporation, reflecting the necessary adjustment for the period from the last audited financial statement to the date of the interim unaudited financial statement submitted under letter (f) of this Section, using the format and observing the guidelines set forth in Part VII of BIR Form No. 0901 -C.
f. Financial Statement
a. Certified copy of the audited financial
statements of the Philippine corporation for the year prior to the sale or transfer of the subject shares of stock; and
b. Original copy of the audited financial
statement of the Philippine corporation as of the date of sale. In case the audited financial statement as of the date of the sale is not available, the most recent unaudited or interim financial statement as of the date of sale may be used. Necessary adjustments made to reflect transactions made during the period from the date of such financial statement to the date of the sale must be indicated in a Comparative Schedule of Property, Plant and Equipment. 2
g. Certified copy of BIR Form No. 0605 and the official receipt reflecting the
payment of the processing and certification fee with an authorized agent bank under the jurisdiction of Revenue District Office No. 39.
h. Certified copy of BIR Form No. 2000-OT and the official receipt reflecting
the payment of the documentary stamp tax on the subject sale or transfer of the shares of stocks. If the documentary stamp tax shall be borne by the nonresident seller and/or nonresident buyer, the tax shall be paid and the return shall be filed with an authorized agent bank under the jurisdiction of Revenue District Office No. 39. In case the buyer is a resident of the Philippines, the return shall be filed and the tax shall be paid in accordance with Section 200(C) of the National Internal Revenue Code of 1997, as implemented by the prevailing Revenue Regulations.
For all other transactions not considered as a straight sale , as hereunder defined, the applicant income earner, in addition to the abovementioned documents, shall submit the contracts/agreements or any other document evidencing the entire transaction, e. transfers of shares of stock. A long form ruling in lieu of the certification prescribed under RMO 30-2002 shall be issued for applications involving shares of stock that are not considered as a straight sale.
Personal Services The following documents shall be submitted in addition to the documents required under Section 3 hereof together with three (3) copies of duly accomplished BIR Form No. 0901-S when the “Independent Personal Service” Article or the “Dependent Personal Service” Article, as the case may be, or any of their equivalent Article, of the appropriate tax treaty is being invoked, viz :
1. Original or certified copy of the notarized service contract.
11. Double taxation agreement
Individual Taxpayer
later.
As for matters without issue on income characterization, the ruling must be available for release after thirty (30) working days from the date of receipt of the TTRA or from the date the complete documentary requirements are received by ITAD, whichever comes later. Of the said periods, the ITAD shall have forty (40) or twenty (20) working days as the case may be to process and evaluate the said application, while the Legal Service/Legal and Inspection Group shall have twenty (20) or ten (10) working days, respectively.
Signatory Of The Ruling.— The rulings issued under this Order shall be signed by the Assistant Commissioner for the Legal Service and/or the Deputy Commissioner for Legal and Inspection Group in accordance with existing Revenue Delegation Authority Order (RDAO). However, rulings of first impression or any ruling which will cause the reversal, revocation or modification of any existing ruling shall be signed by the Commissioner of Internal Revenue in accordance with Section 7(B) of the Tax Code as amended.
Request For Review Of Rulings Adverse To The Taxpayer.— Any ruling issued which is adverse to the nonresident income earner may, within thirty (30) days from the date of receipt of such ruling, seek its review by the Secretary of Finance in accordance with Department Order No. 23-01. No request for reconsideration of the said adverse ruling shall be entertained by this Bureau.
“No Ruling” Area • Requests for rulings not accompanied by complete documents as herein prescribed and those which are based on hypothetical transactions or future transactions are construed and identified as “No-Ruling Area” 3.
For this purpose, any request for ruling construed and identified as such shall not be accepted by the ITAD. ITAD shall strictly implement this rule. Request for Additional Documents
In the course of review of the tax treaty relief applications, the Bureau thru ITAD reserves the right to request additional documents/revise or update documentary requirements to properly process TTRA’s keeping it abreast with changes/modernization of way transactions are done by taxpayers through the issuance of an amendatory RMO to be applied prospectively. Confidentiality of the Draft Rulings or Recommendations
The case and reviewing officers shall not disclose to any person, including the tax treaty relief applicant or his/its representatives, the draft BIR Ruling or recommendation for the action taken on the TTRA, unless and until the same has been signed by the proper signatory of this Bureau. [Section 3(d), Rules IV, Rules Implementing Republic Act No. 6713]. However, for transparency of information, any applicant/filer can rightfully know the status of his/its TTRA without disclosing the stand of the Bureau (i. whether the same will be granted or denied) on the TTRA. Reporting • The Chief, ITAD thru the ACIR, Legal Service shall prepare a monthly report of signed and issued rulings, including a list of archived and discontinued taxpayer transactions covered by a TTRA due every 10th day of the following month.
Benefits Exempt Under Treaty or International Agreements
Employee benefits of non-filipino nationals and or non-permanent residents of the Philippines from foreign government, embassies or diplomatic missions and international organizations in the Philippines are exempt from income tax.
Exemption from withholding tax does not mean income tax exemption
Foreign embassies, diplomatic missions and international organizations are immune from income tax including the obligation to withhold income tax by virtue of international comity as embodied in several international agreements to which the Philippine is a signatory.
However, this exemption from the obligation to withhold tax does not mean income tax exemption to their Filipino employees. In fact, most of the international agreements to which the Philippine is signatory limit exemption only to non-Filipino nationals and/or non-residents of the Philippines.
Filipino employees of foreign governments, international missions and organizations are taxable as a rule, except only to employees of the following organizations:
- United Nations (UN)
11. Double taxation agreement
PROBLEMS
- Specialized Agencies of the United Nations
- Australian Agency of International Development (AUSAID)
- Food and Agriculture Organization (FAO)
- World Health Organization (WHO)
- United Nations Development Programme (UNDP)
- International Organization for Migration (IOM)
- International Seabed Authority (ISA)
These organizations have exemption provision that extends even to their Filipino employees. Other aid agencies or international organization may have tax free provision in their articles of agreement on Filipino employees. Confirmation of Tax Exemptions
The exemption of Filipino employees is not automatic. Filipino claiming exemptions under the terms of international agreements or under provisions of special laws granting privileges to international organizations shall file an application for confirmation of tax exemption with the BIR’s International Tax Affairs Divisions (ITAD). The confirmation shall serve as proof of exemption. Without the confirmation certificate, the employee is taxable. Employees of Philippine Embassies or Consulate Offices
It should be recalled that employees working on Philippine embassies or Philippine consulate offices are not considered non-resident citizen and are therefore subject to Philippine income tax. Summary of rules: In the Philippines: -Filipino citizens -Aliens
Foreign embassy, missions or organizations
Taxable* *Taxpayer must prove if there is an exemption grant under contract or special law
Exempt
Philippine embassy or consulate office
N/A N/A
Abroad: -Filipino citizens -Aliens
Foreign embassy, missions or organizations
Exempt Exempt
Philippine embassy or consulate office
Taxable Exempt
What is a tax treaty? a. Is convention or agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (and on capital). b. Is intended to promote international trade and investment in several ways, the most important of which is by allocating taxing jurisdiction between the Contracting States so as to eliminate or mitigate double taxation of income. c. Is intended to permit the Contracting States to better enforce their domestic laws so as to reduce tax evasion. d. Is international agreement between two or more states (contracting states) for efficient enforcement and beneficial implementation of tax laws.
What is the purpose of tax treaty? I. Is convention or agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (and on capital). II. Is intended to promote international trade and investment in several ways, the most important of which is by allocating taxing jurisdiction between the Contracting States so as to eliminate or mitigate double taxation of income. III. Is intended to permit the Contracting States to better enforce their domestic laws so as to reduce tax evasion. IV. Is international agreement between two or more states (contracting states) for efficient enforcement and beneficial implementation of tax laws.
a. I and II b. II and III c. III and IV d. All of the above
A Domestic Corporation pays royalty to a Foreign Corporation but it withholds a tax lower than Philippine tax laws based on a treaty. What document need be presented to prove the imposition of a lower withholding tax? a. Treaty law; b. Memorandum of agreement between the local and international company; c. Reciprocity clause; d. Tax treaty relief application.
What taxes are covered by Philippine Tax Treaties? I. Income tax II. Business tax III. Transfer tax IV. Documentary stamp tax
Double Taxation Agreement (DTA) (1101) in the Philippines
Course: Income And Business Taxation (BMGT 25)
University: Cavite State University
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