If a taxpayer was given two benefits which cannot be simultaneously availed, who should choose which benefit to avail -- the government or the taxpayer?
If we apply Revenue Memorandum Order (RMO) No. 27-2016 dated June 23, 2016 with regard to the final withholding tax (FWT) on dividends paid to foreign corporate shareholders, it appears that it is the government who can choose. However, the effectivity of this RMO was suspended by the BIR under Revenue Memorandum Circular No. 69-2016 dated July 1, 2016. Is the suspension good news?
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.
So, is the suspension good news?
The views or opinions in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.
Realyn M. Postrado-dela Cruz is an Assistant Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
realyn.m.postrado@ph.pwc.com
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.
So, is the suspension good news?
The views or opinions in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.
Realyn M. Postrado-dela Cruz is an Assistant Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
realyn.m.postrado@ph.pwc.com
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