When businesses are conducting transactions and commercial activities across multiple jurisdictions, they must be aware of the potential for tax to be applied twice on the same activity!
“Double Taxation” is an issue that can arise for businesses across many types of cross-border transactions and activities including receipt of business profits, dividends, interest, royalties, CGT and others.
In the Philippines, the Bureau of Internal Revenue, or the BIR, have developed specific tax treaty relief procedures when paying dividends, interest and royalties income to Non-Resident corporations. This is provided for under Revenue Memorandum Order No. 8-2017 and implemented through the BIR Certificate of Residence for Tax Treaty Relief Form, commonly known as the CORTT Form.
In this article, we explain the key elements of RMO No. 8-2017 and all you need to know about the BIR CORTT Form.
What is Double Taxation?
Double taxation can arise when taxes are imposed twice on the same transaction, the same income source or the same asset, in two different countries or tax jurisdictions.
Being taxed in two different jurisdictions on the same activity or transaction is not something that businesses will want to have on their Books of Account! So countries have addressed this potential “double tax” issue through the development and application of tax treaties.
For further information on taxes in the Philippines, check out our article on Taxation for Corporations in the Philippines – Why so complex?
Ok. So, what’s a Tax Treaty?
A tax treaty is an agreement between certain countries that has been developed to avoid a situation arising where a company is required to pay tax in more than one country for the same commercial activity.
Two key objectives of a tax treaty are to:
- Minimise the potential for double taxation to arise in cross-border transactions; and
- Reduce the potential for tax evasion to occur where companies are engaging in cross-jurisdiction commercial activities.
The Philippines has a substantial network of tax treaties with other countries. In order to achieve the intent and objectives of these tax treaties, administrative procedures have been established.
In the Philippines, Non-Resident Corporations that generate income from sources within the Philippines can have tax treaty relief applied to this income in order to avoid being taxed in their resident country and in the Philippines. Depending on the particular type of income, a Tax Treaty Relief Application, or TTRA (see below), may be required here in the Philippines.
For additional information on cross-jurisdiction transactions involving related-parties, check out our recent article on Related-Party Transactions and Transfer Pricing in the Philippines – New BIR Requirements!
What is a TTRA?
Revenue Memorandum Order No. 72-2010 prescribes the procedures and requirements relating to Tax Treaty Relief Applications (TTRAs), commonly known as BIR Forms 1901.
There is a requirement for the completion by Non-Resident individuals or corporations of different TTRAs depending on the source of income for which tax treaty relief is being claimed.
The main income sources for which a TTRA is required to be submitted (to avail of tax treaty relief) under RMO No. 72-2010 include the following:
|BIR Form 0901-P||For Business Profits|
|BIR Form 0901-T||For Profits from Shipping and Air Transport|
|BIR Form 0901-C||For Capital Gains|
|BIR Form 0901-S||For Income from Services|
|BIR Form 0901-O||For Other Income Earnings|
The above TTRAs are submitted to the International Tax Affairs Division, or the ITAD.
Further information on the procedures and requirements for TTRAs in the Philippines and access to the above-listed BIR forms can be found on the Application Forms Section of the BIR Website.
RMO No. 8-2017 and the CORTT Form
In 2017, the Bureau of Internal Revenue or BIR issued Revenue Memorandum Order No. 8-2017. RMO No. 8-2017 adopted a self-assessment system and automatic withholding of taxes for Non-Residents of the Philippines that receive income through dividends, royalties and interest from sources within the Philippines. This effectively amended the procedures and requirements for filing for tax treaty relief under RMO No. 72-2010 specifically in relation to the income sources of dividends, royalties and interest.
RMO No. 8-2017 created new procedures and requirements for Non-Residents claiming tax treaty benefits for these three income sources.
In particular, RMO No. 8-2017:
- Created a new Certificate of Residence for Tax Treaty Relief Form (CORTT);
- Enhanced BIR Forms 1601-F (Monthly Remittance Return of Final Income Taxes Withheld) and 1604-CF (Annual Information Return of Income Taxes Withheld on Compensation and Final Withholding Taxes) and required full disclosure of income generated by Non-Residents through these forms by the withholding agent/payor;
- Imposed a compliance check on the availing of tax treaty relief and adherence to withholding tax obligations; and
- Mandated a post-reporting validation of final withholding tax payments on Non-Resident income from these three sources.
What’s a Non-Resident?
Under RMO No. 8-2017, a Non-Resident is defined as either:
- A Non-Resident Alien – Someone not engaged in trade or business and who has not stayed in the Philippines for more than 180 days in a calendar year; or
- A Non-Resident Foreign Corporation being a corporation registered in another jurisdiction and not engaged in trade or business in the Philippines.
General Guidelines under RMO 8-2017
The below list summarizes some of the key elements under RMO No. 8-2017:
- RMO No. 8-2017 applies only to income generated from dividends, royalties and interest.
- The new CORTT Form replaces the old 0901 Forms for dividend, interest and royalty incomes.
- The mandatory TTRA (see above) shall no longer be filed with the ITAD. Preferential treaty rates for dividends, interests and royalties shall be applied (through withholding final taxes) and used outright by the withholding agents upon submission of the CORTT Form.
- Non-Residents can use their prescribed Certificate of Residency of their own country of residence but they must still complete certain sections of the CORTT Form.
- For dividend income, the CORTT Form is valid for two years from the date of issuance. For interest and royalty income, the CORTT Form is valid on a per contract basis.
- Withholding agents can outright withhold tax at a reduced rate, or exempt the Non-Resident based only on the completed CORTT Form received by them.
- If a CORTT Form is not submitted, it’s presumed that the Non-Resident is not claiming tax treaty relief and the relevant income tax obligations will apply.
- The BIR will conduct regular audit investigations through compliance checking, post reporting validation on withholding tax obligations and review of availed treaty benefits.
Procedure for Availing of Tax Treaty Relief
- Non-Residents claiming tax treaty relief on dividends, interest and royalties shall submit a completed CORTT Form to the payor or withholding agent in the Philippines.
- The withholding agent shall file BIR Form 1601-F and BIR Form 1604-CF and shall pay the withholding taxes due in accordance with their relevant tax obligations in the Philippines.
- The withholding agent/income payor will submit an original copy of the CORTT Form within 30 days of payment of withholding taxes due on dividend, interest and royalties income.
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