Change in Rules on the Enjoyment of Preferential Treaty Tax Rates on Dividend, Interest and Royalty Income from the Philippines
Philippine tax rules, in general, require any type of income received by non-residents to be taxed at a rate of 25% for individuals or 30% for corporate entities. However, preferential treaty rates may be applied if the non-resident recipients are residents of jurisdictions with which the Philippines has existing tax treaties and subject to confirmation of the Bureau of Internal Revenue (“BIR”).
On 28 March 2017, the BIR issued new guidelines (“RMO 8-2017”) on how non-residents from treaty jurisdictions can enjoy preferential withholding tax rates for their dividend, interest and royalty incomes earned from domestic sources. RMO 8-2017 aims to increase the BIR’s efficiency in administering its present network of 40 effective tax treaties, with two more treaties waiting to be implemented and two pending ratification.
Under RMO 8-2017, to apply preferential treaty rates, non-residents will no longer be required to obtain a favorable Tax Treaty Relief Application (“TTRA”) ruling with the BIR International Tax Affairs Division (“ITAD”) with respect to dividend, interest and royalty income payments. Instead, the enjoyment of preferential treaty rates for such types of income is conditioned upon the submission to their income payers of a Certificate of Resident for Tax Treaty Relief (“CORTT”) form before the income is paid or credited. However, with respect to other types of income, such as business profits, capital gains and other payments to non-residents, a TTRA ruling will still be required.
The CORTT form consists of two parts and requires details of the withholding of tax payment, as well as specific information about the dividend, interest and royalty income payment. A portion of Part I of the CORTT Form will have to be either certified by the foreign tax authority of the non-resident recipient. Non-residents can also use the prescribed certificate of residency of their country of residence. However, they are still required to submit at least the first part of the CORTT form for monitoring purposes.
For dividend income payments, the CORTT Form will generally be valid for two years from the date of issuance. For interest and royalties, the CORTT Form will be required for each contract.
If a non-resident fails to submit a CORTT form to its income payer, their dividend, interest and royalty incomes shall be subject to regular domestic rates under the Philippine Tax Code.
In case a non-resident has a pending application for TTRA ruling prior to the effective date of RMO 8-2017, it should simply attach the CORTT Form to its copy of the filed application. This considers their application as approved, subject to a BIR compliance check.
RMO 8-2017 applies to payments made on or after its effective date, 90 days from the RMO’s date of signing. The date of signing and the effective date will be clarified by the BIR in subsequent public hearings
This alert is for general information only and is not a substitute for legal advice.