Taxwise Or Otherwise

One key change to our shopping experience has been the rise of mobile shopping apps. These apps offer unparalleled convenience and, at times, unbelievable savings. I recall one experience this year during the “7.7” flash sale where I was notified by my smartphone of drastically lowered prices for any and all kinds of products. Lo and behold, the golf club which I had been saving up for was available. Surprisingly, it only cost about a fifth of the selling price from a brick and mortar authorized retailer. To my disappointment, however, the golf club broke after only my second round of using it.

This incident made me realize that we should be cautious of the products we buy online and remain steadfast against counterfeit items. At the very least, we should check the comments and reviews section of the merchant’s page to get feedback on the merchant and the quality of the products it is selling.

In a similar vein, our tax authorities have enforced strict measures to ensure that documents submitted by taxpayers are authentic, especially when the documents are executed overseas.

To cite an example, Revenue Memorandum Order (RMO) No. 46-2020 was issued by the Bureau of Internal Revenue (BIR) to promulgate guidelines and procedures for the availment of the 15% rate on dividends paid by a domestic corporation to a non-resident foreign corporation (NRFC), otherwise known as the Tax Sparing Rule. In the RMO, the BIR requires certain documents to be authenticated or apostilled in order to prove an NRFC’s entitlement to the lower rate.

Under Section 28(B)(5)(b) of the Tax Code or the Tax Sparing Rule, the final withholding tax (FWT) on Philippine-sourced dividends received by an NRFC can be reduced from 25% to 15%. To avail of the tax sparing rate, the NRFC-applicant must prove that the foreign tax jurisdiction of the NRFC either: a) allows a credit against the tax due from the NRFC the taxes deemed to have been paid in the Philippines of at least to 10%; or b) exempts the dividends from tax.

For this purpose, the RMO requires the NRFC-applicant to submit the following documents:

• A copy of the law of the country of domicile allowing a tax credit for taxes actually paid in the Philippines and for taxes deemed paid in the Philippines equivalent to at least 10% of the dividends; and

• A copy of any document issued by, or filed with, the foreign tax authority showing the amount of deemed paid tax credit actually granted by the foreign tax authority or a document confirming that the NRFC is exempt from income tax on dividends received from the Philippine corporation.

Based on the RMO, in order to be acceptable in the Philippines, all documents executed in a foreign country must either be authenticated by the Philippine Embassy stationed there, or apostilled if the foreign country is a signatory to the Convention Abolishing the Requirement of Legalization for Foreign Public Documents (HCCH 1961 otherwise known as the Apostille Convention).

The reason for the authentication requirement, as cited by the BIR, is that existence of a foreign law is a question of fact and Philippine courts do not take judicial notice of foreign laws. Thus, citing Section 24 and 25 of Rule 132 of the Revised Rules on Evidence, the BIR requires that a foreign law be established by a certification and authenticated copy thereof. In case the country of Domicile of the NRFC is a member of the Apostille Convention, a foreign law can also be established by submitting an apostilled copy thereof in lieu of the required certification and authentication.

In practice, if the copy of the foreign law and other required documents executed abroad are not apostilled or authenticated and certified, the BIR will not accept the taxpayer’s Tax Sparing application.

While the intention is to guard against spurious and outdated versions of the foreign tax law, the strict authentication requirement has become a burden for NRFCs intending to avail of lower tax rates on their Philippine sourced income. Not only does the authentication process entail additional costs for the NRFC-applicant, it normally takes a long time to apostille or authenticate a document, taking as long as a month in certain jurisdictions.

Foregoing considered, I think that the BIR could revisit these strict requirements. The BIR is an administrative agency tasked to enforce the National Internal Revenue Code of the Philippines. Thus, it need not adhere strictly to the requirements of the Rules of Court with regard to administrative matters. In administrative proceedings, case law provides that the technical rules of procedure and evidence are not to be strictly applied. The quantum of evidence in administrative proceedings is substantial evidence, which refers to more than a mere scintilla, but such quantum of relevant evidence which a reasonable mind might accept as adequate to justify a conclusion.

Thus, in lieu of the strict authentication or apostille requirements to prove the foreign tax law, the BIR may consider accepting documents from other verifiable sources. In fact, in one BIR Ruling confirming the application of the Tax Sparing rule issued prior to RMO No. 46-2020, a full text copy of the foreign jurisdiction’s tax law from a reliable source (i.e., website of a reputable audit firm located in the NRFC’s country) was accepted by the BIR. If the copy of the foreign tax law is from a reputable source (such as a copy of the tax law from the government’s official website), I think that the BIR could dispense with the requirement of authenticating or apostilling the copy of the foreign law since the BIR can readily verify the authenticity of its contents.

To conclude, I fully agree that the BIR should remain vigilant when evaluating documents, just as online buyers should be careful with potential counterfeit purchases made over an online platform. Nevertheless, RMO No. 46-2020 was issued to simplify the manner of confirming entitlement to reduced tax rates in view of the implementation of the Ease of Doing Business and Efficient Government Service Delivery Act of 2018. Perhaps, the BIR should exercise some flexibility with its requirements to better achieve the government’s overarching intention.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.


Jose Luis M. Yupangco is a senior associate at the Tax Services department of Isla Lipana & Co., the Philippine member firm of the PwC network.

+63 (2)8845-2728