For most businesses in the Philippines, the first quarter of the year demands compliance: annual registration renewals, filing of tax returns, submission of financial statements, and payment of taxes. Corporate and tax practitioners have infamously tagged this period as the busy season in which they find themselves working round the clock, often fueled with multiple doses of caffeine.
Businesses operating on a calendar year basis are required to file their annual Income Tax Returns (ITR) on or before April 15. Apart from the usual filing of the ITR, taxpayers must also be reminded that there is another BIR Form that needs to be filed on or before the last day of April — the request for confirmation (RFC) on the propriety of the tax treaty rates applied by withholding agents covering the latter’s pertinent transactions during taxable year 2021. The RFC is to be filed with the Bureau of Internal Revenue — International Tax Affairs Division (BIR-ITAD).
When a Philippine taxpayer transacts with a nonresident foreign corporation or a nonresident alien not engaged in trade or business, the taxpayer acts as a withholding agent and is required to withhold taxes due on the income payments derived by the nonresident from all sources within the Philippines. The withholding agent is responsible for determining whether to apply the regular tax rates, tax exemptions, reduced rates, or the relevant provision of the applicable tax treaty when dealing with residents of a foreign country that has a double tax agreement with the Philippines.
In Revenue Memorandum Order (RMO) No. 14-2021, the BIR provided that if the withholding agent applied the tax treaty rates on the income earned by the nonresident, the withholding agent must file with ITAD a request for confirmation on the propriety of the withholding tax rates applied on that item of income. Thus, a request for confirmation applies to all income derived by nonresidents from Philippine sources that may be entitled to relief from double taxation under relevant tax treaties.
Revenue Memorandum Circular (RMC) No. 77-2021 highlighted that the RFC with complete documentary requirements is to be filed by the withholding agent depending on the type of income. For capital gains, the date of filing is at any time after the transaction but not later than the last day of the fourth month following the close of the taxable year when income is paid or when the transaction is consummated. If the taxpayer observes a calendar year, then the fourth month falls on April 2022 for 2021 transactions.
For other types of income, the date of filing is any time after the close of the taxable year but not later than the last day of the fourth month following the close of such taxable year. These other types of income include business profits, dividends, interest, royalties, and other income not expressly mentioned in the tax treaty. Consequently, if the taxpayer observes a calendar year, then the fourth month will fall in April 2022 for 2021 transactions.
In RMC 77-2021, the BIR declared that applications with incomplete documents will no longer be accepted. Accordingly, it is imperative upon the withholding agent to ensure that all documents in support of the RFC are complete. Hence, for 2021 transactions, withholding agents should already be preparing during this time for the upcoming April 2022 deadline.
It should be noted that documents issued, signed, and executed abroad are required to be authenticated. Considering that the Philippines is a party to the Hague Convention, a foreign public document will only need to be apostilled by the competent authority in the foreign state in order to be recognized and used in the Philippines. However, the apostille only applies if both the country where the public document was issued and the country where the public document is to be used are parties to the Convention. Otherwise, the document is required to be notarized abroad and further authenticated by the Philippine consul in the foreign country signing and affixing a red ribbon to the document. In addition, if the documents are in a foreign language, they are required to be translated in English by a certified translator.
Another documentary requirement which may take some time to secure is the Certificate of Non-Registration of the foreign company duly issued by the Securities and Exchange Commission (SEC). Since the SEC receives numerous requests, the certificate may be obtained weeks or even a month after request and payment of the certification fees.
The documents that the BIR-ITAD requires are important to prove the entitlement to the benefits of a tax treaty. Indeed, the procurement and authentication of documents may be challenging and may take extra effort and time. Thus, withholding agents should start collating the required documents as early as possible to ensure that complete documents are filed with the BIR on time.
The list of documents required to be prepared for the upcoming April 2022 deadline for RFCs is found in the annexes of RMC 77-2021. Failure to file the RFC within the prescribed deadline will result to penalties.
As we bustle our way into the tax season with tight deadlines in mind, let us be reminded that being prepared is half the battle.
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.
Azanith Ann B. Payad is an associate from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.