Tax Treaty Relief in the Philippines: How Foreign Companies Claim Lower Tax Rates
A foreign company that earns income from the Philippines may pay a lower tax rate if its country has a tax treaty with the Philippines. Under Revenue Memorandum Order No. 14-2021, it must give the Philippine payor BIR Form No. 0901 and a Tax Residency Certificate before the first payment. If the payor uses the treaty rate, the payor files a Request for Confirmation with the BIR. If the regular rate was withheld, the foreign company files a Tax Treaty Relief Application and may claim a refund.
What is tax treaty relief in the Philippines?
A tax treaty is an agreement between two countries on how they tax the same income. It can lower the Philippine tax on income paid to a resident of the other country. Tax treaty relief is the process of claiming that benefit.
The Bureau of Internal Revenue (BIR) is the Philippine tax authority. Its rules on claiming treaty benefits are in Revenue Memorandum Order No. 14-2021, dated March 31, 2021. The order covers dividends, interest, royalties and other Philippine-source income earned by nonresidents.
The Philippine payor is called the withholding agent. It takes the tax out of the payment and remits it to the BIR. For related topics, see our guides on the tax treatment of cross-border services and on whether a foreigner can own a business in the Philippines.
What must a foreign company give the Philippine payor before payment?
Before the first payment of income, the foreign company must give each withholding agent two documents:
BIR Form No. 0901, also called the Application Form for Treaty Purposes, filled out and signed
A Tax Residency Certificate issued by the tax authority of its home country
If these are not given when the payor asks for them, the payor may withhold at the regular rate instead of the treaty rate.
Who files with the BIR: the payor or the foreign company?
It depends on the rate that was used.
If the treaty rate was used, the withholding agent files a Request for Confirmation. It asks the BIR to confirm that the rate was proper.
If the regular rate was used, the foreign company files a Tax Treaty Relief Application, or TTRA, to prove that it is entitled to the treaty benefit.
Both are filed with the International Tax Affairs Division (ITAD) of the BIR. The order gives ITAD authority over issues on the application of treaty provisions.
What is the deadline for a Request for Confirmation or a TTRA?
A Request for Confirmation may be filed at any time after the withholding tax is paid.
But it must be filed not later than the last day of the fourth month after the close of each taxable year. For a payor that uses the calendar year, that is April 30 of the following year.
A TTRA has no fixed deadline. The foreign company may file it at any time after it receives the income. A refund claim, however, has its own time limit, discussed below.
For a contract that runs for more than one year, an annual update is filed by the same fourth-month deadline.
The order says new applications are processed within four months from the filing of complete documents, or as soon as practicable while the BIR clears older applications.
What documents does the BIR require?
The general requirements under the order are:
A letter-request
The Application Form, signed by the nonresident or its authorized representative
The Tax Residency Certificate for the period covered
Bank documents or other proof that the income was paid or remitted
The withholding tax return with the alphalist of payees
Proof of payment of the withholding tax
A notarized Special Power of Attorney, if a representative files
Originals or certified true copies are required. Documents signed abroad must be authenticated by a Philippine Embassy or apostilled. The order also lists more documents that depend on the kind of entity and the kind of income.
What happens if the BIR denies the treaty rate?
If the BIR finds that the foreign company is not entitled to the treaty benefit, or that the rate used was lower than the treaty allows, it issues a BIR Ruling that denies the request. The withholding agent must then pay the deficiency tax and penalties.
A late Request for Confirmation is also subject to penalties under Sections 250 and 255 of the Tax Code.
This risk falls on the Philippine payor. So the payor has good reason to ask for complete documents before it uses a treaty rate. Our guides on unremitted withholding taxes and on transfer pricing compliance explain related duties of the Philippine company.
Can a foreign company get a refund if the regular rate was withheld?
Yes.
After the BIR issues a certificate that confirms the treaty benefit, the foreign company may claim a refund of the difference between the tax withheld and the tax due under the treaty.
The claim is made with BIR Form No. 1913 and a letter-request. It may be filed together with the TTRA or separately. It must be filed within the two-year period under Section 229 of the Tax Code.
See our guides on how to file a tax refund claim and on the two-year period for tax refunds.
Frequently asked questions
Is a BIR filing needed before the treaty rate is used?
Under the order, the filing with the BIR comes after payment. The Request for Confirmation is filed after the withholding tax is paid. But the foreign company must give Form No. 0901 and the Tax Residency Certificate to the payor before the first payment.
What is a Tax Residency Certificate?
It is a certificate issued by the tax authority of the foreign company's home country. It shows that the company is a tax resident there for the period covered.
What if the contract runs for more than one year?
An update is filed each year until the contract ends, with an updated Application Form and a new Tax Residency Certificate if the old one has lapsed.
Where are the applications filed?
They are filed with the International Tax Affairs Division of the BIR.
Sources
Revenue Memorandum Order No. 14-2021, March 31, 2021 (Bureau of Internal Revenue)
National Internal Revenue Code of 1997, as amended, Section 229
National Internal Revenue Code of 1997, as amended, Sections 250 and 255
Facing a BIR audit, assessment or tax dispute?
Aureada CPA Law Firm's CPA-lawyers handle BIR audits, assessment protests, refund claims and Court of Tax Appeals cases from our Makati and Lucena offices. See our tax services.
You can also email info@aureadalaw.com or call (02) 8812-9990.
Related guides
This article is general information as of its publication date, not legal advice, and does not create a lawyer-client relationship. For advice on your situation, consult a lawyer.
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