Under this suspended RMO, the Bureau of Internal Revenue (BIR) issued procedures
for claiming tax treaty benefits for dividend, interest and royalty income of nonresident
income earners.
Interestingly, the RMO also covers the application of the 15% preferential tax rate on
intercorporate dividends paid to non-resident foreign corporations (NRFC) under
Section 28(B)(5)(b) of the Tax Code, or the “tax sparing rule.” Pursuant to this provision,
a lower 15% FWT rate will be imposed on dividends received by an NRFC if the country
in which the NRFC is domiciled allows a tax credit against the tax due from the NRFC
representing taxes deemed to have been paid in the Philippines equivalent to 15%.
Under the suspended RMO, the tax sparing rule shall apply to an NRFC which is a
resident or is domiciled in a country which: (1) has no effective tax treaty with the
Philippines; (2) has a worldwide system of taxation; and (3) allows a tax credit against
the tax due from the NRFC dividend taxes deemed to have been paid in the Philippines
equivalent to 15%.
In its previous rulings, the BIR ruled that “the only condition for the application of the tax
sparing credit is that the country-domicile of the recipient corporation allows a credit
against the tax due from non-resident foreign corporations.” It appears, however, that
these new requirements are more rigid which may result in the denial of the taxpayer's
benefits.
First, based on the same RMO, in order for the tax sparing rule to apply, the Philippines
must not have a tax treaty with the country of residence of the NRFC. It is worthy to
note in some tax treaties, an NRFC must hold a minimum percentage in a domestic
corporation before a preferential tax rate would apply (e.g., NRFC from Singapore must
hold at least 15% minimum stockholdings in a Philippine company in order to apply the
15% preferential tax rate. Otherwise, 25% FWT will apply). In other treaties, the
preferential tax rate is higher than the 15% rate under the tax sparing rule (e.g., the
Philippines-US tax treaty provides for 20% and 25% FWT on dividends). Thus, there are
instances where the preferential tax rate under the tax sparing rule is more beneficial to
the NRFC than those provided under the treaty. This does not actually result in a
conflict since the tax treaties provide for the maximum rate that a treaty country can
impose. It does not provide a definite rate.
Applying the RMO, the presence of a tax treaty removes the NRFC’s benefit under the
tax sparing rule, even if the latter is more beneficial than the maximum FWT rate under
the treaty? Does the BIR have the authority to remove that benefit from a taxpayer even
if it is clearly provided under the Tax Code? Understandably, a taxpayer cannot enjoy
both benefits simultaneously, but can our tax authorities choose which benefit is
applicable to a taxpayer, especially if it is detrimental to the taxpayer?
Secondly, the RMO requires that the country of residence/domicile of the NRFC must
have a “worldwide system of taxation.” It does not provide specific guidance on what
this means.
Thirdly, the RMO retained the deemed tax paid credit under the Tax Code. In this
regard, the RMO requires the submission of a consularized copy of the law of the
country of the NRFC which expressly allows the said credit is required to be submitted
in the application for tax sparing rule. If the country does not subject the dividends to
tax, does this mean that the dividends will then be subject to 30% FWT? If so, this
would be contrary to the Supreme Court case which confirmed the 15% FWT rate on
dividends also applies to an NRFC where the country of residence does not impose any
tax on the dividends.
Finally, pursuant to the suspended RMO, it seems that the filing of an application for a
tax sparing ruling is required to avail of the benefits. The RMO is, however, silent if
whether the application should be made before the availment of the benefits (as a pre-
requisite) or after the availment (merely serving as a confirmation). This begs another
question, would a ruling be required (whether confirmatory or not) to avail of the
preferential tax rate even if there’s no such requirement under the Tax Code? Would it
not be a void requirement as beyond the authority of the BIR?
It is good thing that the said RMO was suspended by the new BIR commissioner.
Maybe the foregoing issues were also considered by the BIR in suspending the
effectivity of the RMO and retaining the suspension to date. Our country needs foreign
investments. In order to entice foreign investors, our taxes should be competitive with
those of other countries. One of the means provided to encourage foreign investments
is the tax sparing rule.
It is worthy to note that the BIR has a draft RMO on the new procedures for the
availment of tax treaty relief on dividends, royalties and interest. However, this does not
cover the tax sparing rule. Currently (and with the suspension of this particular RMO),
there is no BIR issuance that tackles the tax sparing rule. It may help if the BIR would
issue a regulation specifically setting guidelines to remove any uncertainties. However,
in doing so, the BIR should also consider that one of the purposes of this provision is to
attract foreign investors to the Philippines, and not to discourage them with unnecessary
and complicated requirements.
