International businesses are often faced with issues of being taxed twice on the same income. This occurs when the same income is taxed in two different countries. Under the tax rules, domestic corporations and individual resident citizens are subject to Philippine income tax on their worldwide income. For such taxpayers, being taxed twice can happen when their foreign-sourced income is taxed in the country where it is earned, and then taxed again in the Philippines.
To address this issue, Philippine tax rules allow foreign tax credits, while the Philippines has entered into tax treaty agreements with other countries. These tax treaties provide exemptions and/or preferential tax rates on foreign-sourced income earned by a tax resident. For a Philippine tax resident that is taxed worldwide, the relevant document is a tax residency certificate (TRC) to prove its residency.
As a refresher, a Philippine TRC is secured from the International Tax Affairs Division (ITAD) of the Bureau of Internal Revenue (BIR). Qualified applicants for the TRC are resident citizens and domestic corporations because only they are subject to tax on their worldwide income. It should be noted, however, that resident aliens and resident foreign corporations are considered “residents” for domestic tax purposes, but they are not qualified for a Philippine TRC, because for treaty purposes, they are only taxed on their income from Philippine sources.
Recently, the BIR issued Revenue Memorandum Order (RMO) No. 43-2020 to streamline the process of issuing TRCs. The RMO was issued in consonance with implementation of Ease of Doing Business and Efficient Government Service Delivery Act of 2018 for government agencies.
In RMO 43-2020, the documentary requirements were shortened to the following:
1. Duly accomplished BIR Form No. 0902;
2. Certified true copy of proofs of income;
3. Photocopy of the passport booklet or residency certificate issued by the Brgy. Chairman if the applicant never left the Philippines;
4. Annual income tax return for the year immediately preceding; and
5. Special Power of Attorney or authorization letter issued by the applicant if processed by an authorized representative.
1. Duly accomplished BIR Form No. 0902;
2. Proof of establishment in the Philippines such as articles of incorporation;
3. Certified true copy of proofs of income;
4. List of partners if the applicant is a general professional partnership;
5. Annual income tax return for the year immediately preceding; and
6. Special Power of Attorney or authorization letter issued by the applicant to its representative.
In the above list, instead of a letter-request application for a TRC, a new form, BIR Form No. 0902 will be accomplished by the taxpayer or an authorized representative.
The RMO also directs the BIR case officer to inform the applicant of any deficiency in the accompanying requirements within three working days either via registered mail or electronic mail. Needless to say, the use of e-mail in government exchanges will be most helpful in expediting the coordination with taxpayers. Further, RMO 43-2020 appears to emphasize that all TRC applications be acted upon within 14 working days from the submission of complete documentary requirements.
On a cautious note, the RMO outlines the treatment of foreign tax credits when a qualified taxpayer fails to secure a Philippine TRC. Those who fail to secure a TRC may not be allowed to claim foreign tax credits in excess of the appropriate amount of tax that is supposed to be paid in the source state had the income recipient invoked the provision/s of the treaty and proved residency in the Philippines. The RMO states that the Philippines should not be made to suffer for the failure of its tax residents to claim treaty benefits.
In relation to the above, the BIR will only allow a qualified Philippine tax resident to claim a foreign tax credit equal to the amount of taxes that would have been imposed on an item of income by the foreign country pursuant to the relevant tax treaty provision.
Consequently, if by virtue of a tax treaty provision, the income is supposed to be exempt in the foreign country, but the Philippine tax resident is still actually subject to tax in that country (due to failure to secure and present a Philippine TRC), the Philippine tax resident will not be allowed to claim as a foreign tax credit such foreign tax, even if the foreign tax is actually paid. Please take note of the illustrative example presented in RMO 43-2020.
With the issuance of RMO 43-2020, the process of securing a TRC now appears to be more efficient for both taxpayers and the government. It bears mentioning, however, that qualified taxpayers should secure a TRC to be entitled to tax treaty benefits.
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.
Neptali G. Maroto is a tax associate of Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.