Let’s Talk Tax
By Ajeth A. Calabano
Having connections with a wide array of business partners can go a long way to help your business survive, expand, or even thrive. With work-from-home setups in place, the use of technology is bringing global businesses or entities together in a smaller circle. One way or another, you may find your company associating with a non-resident foreign corporation (NRFC).
As a taxpayer, what should you look out for when dealing with NRFCs? Let’s have a quick look at some of them.
First, an NRFC is taxable on its income from Philippine sources. If you deal with them, take note that for such income, you are responsible for withholding taxes thereon. An NRFC is generally taxable at 25% final withholding tax (FWT) and at 12% final withholding value-added tax (FWVAT). It is vital that you, as the withholding agent, perform your role, as the Bureau of Internal Revenue (BIR) can run after you, and not after the NRFC, to check up on your withholding tax compliance. Failure to comply may result in deficiency tax assessments and penalties.
Second, there are tax treaty preferential rates and exemptions from FWT available to NRFCs to address the issue of double taxation between a foreign jurisdiction and the Philippines. Guidelines and procedures have been issued by the BIR to streamline the availment of tax treaty benefits under Revenue Memorandum Order (RMO) No. 14-2021.
The application for tax treaty rates may be more beneficial in cases of NRFCs that regularly transact with Philippine companies, or in cases of NRFCs that, although occasionally, transact with Philippine companies in huge amounts. In these cases, if you were a Philippine entity transacting with an NRFC, you may want to initiate the discussion with the NRFC to help reduce the tax cost of the transactions.
In availing of tax treaty benefits, your company, as the withholding agent, may file with the International Tax Affairs Division (ITAD) of the BIR a request for confirmation on the correctness of the preferential withholding tax rates applied. As clarified under Revenue Memorandum Circular (RMC) No. 77-2021, the request for confirmation is to be filed any time after the transaction for capital gains and any time after the close of the taxable year for other types of income but not later than the last day of the fourth month following the close of the taxable year. On the other hand, for those income payments to NRFCs in 2020 and prior years but with no previous tax treaty relief application nor a previous certificate of residence for tax treaty relief, the filing of request for confirmation should be done on or before the last working day of the year.
Third, an NRFC may possibly be a related party. As such, you could face transfer pricing issues. The past few years have seen developments in the transfer pricing guidelines and requirements in the Philippines. Certain taxpayers are required to file information returns disclosing all their related party transactions (RPTs), while others are even further required to have their own transfer pricing documentation (TPD). You must be particularly aware of Revenue Regulation (RR) No. 2-2013, Transfer Pricing Guidelines, Revenue Audit Memorandum Order (RAMO) No. 1-2019, Transfer Pricing Audit Guidelines, and other related BIR issuances to avoid possible disputes with the agency in future BIR audits.
In a BIR audit involving transfer pricing issues, should you have been found to have charged revenue to your NRFC-related party below the arm’s length standard, the BIR may come to a finding of additional taxable income. On the other hand, for related party expenses which are found to be above the arm’s length standard, the BIR may disallow your deductions or portions of your deductions to arrive at an income tax deficiency assessment.
Further, another item to look out for is when your revenue for services rendered to NRFCs is subject to zero-rated value-added tax (VAT). In qualifying for VAT zero-rating, some taxpayers fail to observe the requirements provided under the Tax Code and other relevant VAT issuances. Some of the requirements pertain to the proof of inward remittances of foreign currencies and proof of non-residency of the NRFCs. At a glance, these requirements seem simple enough. However, they are often overlooked by taxpayers due to the tediousness of obtaining and monitoring the needed documents. Nonetheless, preparedness beats the possible hassle come BIR audit in the future. Thus, ensure that you maintain the proper documentation to support your VAT zero-rated revenue transactions.
Indeed, the advent of modern technology and enhanced online communication platforms have further made networking easier. Despite the miles, connecting with NRFCs has become simpler and thus, more global transactions are expected to transpire. Winning international business proposals and securing contracts, or even becoming part of a multinational group, may be the main reasons for connecting with NRFCs, and it would also be prudent to know how to deal with them taxwise.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Ajeth A. Calabano is a senior in-charge of Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.