“Improving Philippine competitiveness” by Reynante M. Marcelo (December 27, 2010)

SUITS THE C-SUITE By Reynante M. Marcelo
Business World (12/27/2010)

As the year comes to a close, we are hopeful that the Philippines will fare better in terms of world competitiveness in 2011.

In the 2010 World Competitiveness Yearbook (published by the International Institute for Management Development) the Philippines ranked 39th out of 58 economies surveyed, up from rank 43rd out of 57 in 2009. This ranking was based on four competitiveness factors: economic performance, government efficiency, business efficiency and infrastructure.

Of some concern is our ranking 56th out of 58 economies in areas such as education, basic and scientific infrastructure and international investments. With the positive energy and upbeat outlook resulting from the national elections in May, we are hopeful that this ranking will improve sooner than later.

In fact, the new administration has already begun encouraging international investment by way of economic programs such as public-private partnerships (PPPs), as well as adopting international standards on exchange of information. While government has already promised to promote investments via easier access to loans, faster processing of permits and the guarantee of protection from regulatory risks (as revealed last November in the new PPP plan), another area for improving our country’s economic attractiveness is in the area of taxes — more specifically, the enforcement of preferential tax treatments under existing tax treaties.

While it is true that taxes are an inescapable part of the cost of doing business anywhere in the world, many multinational companies are drawn to countries with tax treaties that can help reduce or eliminate the effects of double taxation. Tax treaties can cushion the impact of taxes on business operations by prescribing lower rates for certain types of income that are also taxed in another country, or by exempting certain types of income, or crediting the tax paid in a particular country against the tax payable in another country.

In Southeast Asia, the Philippines has a relatively small treaty network, with bilateral agreements entered into with only 37 countries, compared with those of Singapore (61), Malaysia (68) and Indonesia (57). Perhaps another way to support the PPP program is to expedite expansion of this treaty network. However, while it is always good to have a large number of treaty partners, the tax treaties are only beneficial and relevant when they are properly implemented by the parties to the agreement.

In 1986, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Order (RMO) No. 2-86, prescribing the procedure for processing and verifying tax treaty relief applications (TTRAs) in order to prevent the erroneous interpretation and application of treaty provisions. This was followed by RMO Nos. 10-92 and 1-00.

These RMOs gave rise to the question of whether it is mandatory to file a TTRA and secure BIR approval before one can enjoy the benefits of the treaty. On the one hand, it was argued that such filing and prior approval is not necessary because treaties fall within the constitutional provision that makes international agreements part of the law of the land. The proponents of this view argue that a tax treaty is self-executory and does not need prior confirmation from a government administrative agency (such as the BIR) before one can avail of its benefits.

On the other hand, the other argument is that the requirement to file a TTRA and secure prior BIR approval is in line with the objective of ensuring that treaty benefits are enjoyed only by those who are duly entitled to them, as in the case of some Supreme Court decisions that required prior application before the benefits of tax treaties could be availed of.

The recently-issued RMO No. 72-2010 provides the final resolution to this question. RMO No. 72-2010 makes it mandatory to file TTRAs before the transaction. For this purpose, the term “transaction” shall mean the occurrence of the first taxable event. The new issuance clearly states that failure to file the TTRA before the transaction shall have the effect of “disqualifying the TTRA.”

The RMO designates the International Tax Affairs Division (ITAD) as the sole office charged with receiving and processing the TTRA. All rulings relative to the application, implementation and interpretation of the tax treaty provisions shall also emanate from the ITAD. It also prescribes a deadline for the processing of TTRAs, which is within 60 working days from date of receipt of the TTRA or the date of receipt of complete documentary requirements by the ITAD, whichever comes later. On matters involving income characterization, the processing period is shortened to 30 working days. Rulings on the TTRAs shall be signed by the Assistant Commissioner for the Legal Services and/or the Deputy Commissioner for Legal and Inspection Group. Rulings of first impression, or any ruling which will reverse, revoke or modify any existing ruling, will be signed by the Commissioner of Internal Revenue. The remedy for an adverse decision by the BIR on the TTRA is a request for reconsideration, not with the BIR, but with the Department of Finance within 30 days from receipt of the ruling.

There is no doubt that RMO No. 72-2010 significantly clarifies the process for TTRAs, and the time line prescribed for acting on TTRAs gives cause for optimism for speedy resolutions. However, TTRAs filed before the effectivity of RMO No. 72-2010 should not fall by the wayside and should benefit as well from the time line accorded to TTRAs filed after the effectivity of the new RMO.

The year 2011 brings with it new optimism. With the current atmosphere of renewed hope, now is as good a time as any to streamline our tax treaty arrangements and, more importantly, enable the treaties to provide true relief as a way of further stimulating foreign investor interest in the government’s economic programs.

(As of publication, Reynante M. Marcelo is a tax partner of SGV & Co.)

This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.