Prospective investors have to consider a number of factors when investing. From a tax perspective, one consideration is whether there is a tax treaty that provides preferential tax rates on anticipated returns and double taxation can be avoided. Investors who are residents of countries that do not have such treaties with the Philippines, however, are not totally without recourse as far as reducing the tax on their dividend income.
Under Philippine tax law, a 15% tax sparing rate applies on dividends if the country of residence of the nonresident foreign corporation (NRFC) allows a “deemed paid” tax credit against the tax due from the NRFC equivalent to the tax waived by the Philippines. The reduced rate also applies in case the foreign country does not tax the dividends coming from the Philippines.
Prior to December, there was no rule requiring an NRFC to secure a ruling or file any application with the Bureau of Internal Revenue (BIR) when availing of the 15% tax sparing rate. That said, some taxpayers take the precaution of securing BIR confirmation through a ruling to avoid questions in the event of a tax audit.
Those cautious taxpayers likely welcome the issuance of Revenue Memorandum Order (RMO) 46-2020 in December. The RMO provides guidelines for availing of the tax sparing rate on dividends.
The NRFC needs to file with the International Tax Affairs Division (ITAD) of the BIR a request for confirmation of eligibility to the 15% tax sparing rate within 90 days from the remittance of the dividends or from the determination by the foreign tax authority of the deemed paid tax credit/tax exemption, whichever is later.
Moreover, the RMO clarified that holders of Philippine Depositary Receipts (PDRs) may also be entitled to the 15% tax sparing rate provided that: the PDR is coupled with a right to purchase the underlying shares; and that the right can be legally exercised without violating the provisions of the Constitution and special laws, which restrict the ownership and operation of certain companies to Philippine nationals. Under the guidelines, a PDR is defined as “a document that gives the holder a right, but not an obligation, to purchase the underlying shares at a specified price, or the right to the delivery of the sales proceeds of the underlying shares.”
Another good thing about the RMO is that it now provides a uniform list of the documentary requirements to support the tax sparing rate, depending on the applicable circumstances. Further, guidance is also provided in case there are subsequent applications during the year involving the same NRFC, where some of the required documents can already be dispensed with (e.g., tax residency certificate and articles of incorporation of the NRFC).
In lieu of a ruling, the BIR will issue a certification confirming the entitlement to the tax sparing rate. In case of denial, a BIR ruling shall be issued stating the factual and legal bases for denial, which is appealable to the Department of Finance within 30 days from receipt. Such a denial may result in a deficiency assessment for the 15% differential, plus penalties.
POINTS TO PONDER
First, the timelines are one-sided. The BIR requires a 90-day period to file the request for confirmation. To encourage compliance with this new requirement as well as strict observance of timelines, it would be good if there is also a prescribed period for the BIR to issue the confirmation; even better if a deemed confirmation can be considered after a certain period.
Second, is the list of requirements flexible? One of the major ones is a document issued by or filed with the foreign tax authority showing the amount of the deemed paid tax credit actually granted or confirming the tax exemption of the dividends. If the foreign tax authority does not issue such a document, will the request be denied for non-submission of this requirement? Based on an informal inquiry with ITAD, it appears that ITAD does not even issue such a document so it’s not unlikely that foreign tax authorities may also not be inclined to do so.
Third, since the RMO was issued with the Ease of Doing Business Act in mind, perhaps the BIR can consider taking it up a notch by proactively connecting with its counterparts in other countries. One government securing confirmation of the law, or any changes thereto, from their counterpart tax authority might be more efficient than several taxpayers securing the same confirmation from the same tax authority. This can be done at least with jurisdictions where the tax sparing rate is likely to be invoked like the US (where the treaty rate on dividends is higher) or Hong Kong (which has no treaty with the Philippines but where dividends are tax exempt). Such an initiative will surely go a long way to making the country more attractive to foreign investors.
Finally, the RMO is clear that an NRFC whose country of domicile has a tax treaty with the Philippines is not precluded from applying the 15% tax sparing rate instead of the tax treaty rate. That said, if an NRFC’s treaty rate is also 15%, it would be advisable to go the treaty route. While the deadline for filing is shorter, the documentary requirements appear much easier to comply with. Availing of the tax treaty rate would only require the filing of a Certificate of Residence for Tax Treaty Relief (CORTT), tax residency certificate and proof of payment of withholding tax with ITAD and Revenue District Office 39 within 30 days from payment of the withholding tax. There’s no need to wait for the BIR to issue any confirmation on the entitlement to the tax treaty rate. In the meantime, for those that don’t have a treaty option, it looks like the NRFCs must spare a lot to be spared by the BIR.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co.
Elizabeth K. Adaoag-Belarmino is a Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
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