The Supreme Court has spoken
By Jonald R. Vergara
First published in Business World (03/17/2014)
Stability and consistency in rules foster investor confidence particularly among foreign investors. The predictability of policies and implementing regulations allow businesses to plan carefully for the long term without worrying that the rules of the game will change midway. It is, therefore, crucial for Government to nurture this confidence by adopting consistent and uniform rules alongside a stable regulatory framework for business.
Conflicts among businesses and government agencies in the interpretation of laws and regulations usually end up in the courts that can take years to be resolved. On such matters, the Supreme Court (SC) is always the final arbiter.
In its Resolution dated October 23, 2013, the SC denied the BIR’s motion for reconsideration and resolved with finality to uphold its decision in Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue (G.R. No. 188550 dated August 19, 2013). It held that failure to strictly comply with the BIR requirement to file a tax treaty relief application (TTRA) 15 days prior to availing the provisions of a tax treaty, should not deprive a taxpayer of the benefits of a tax treaty. The SC ruled that Deutsche Bank qualifies for the 10% preferential tax rate under the Philippines-Germany Tax Treaty and granted the refund of excess branch profit remittance tax paid to the BIR.
The final decision of the SC on the Deutsche Bank case is undoubtedly a welcome relief to taxpayers. It also ought to remove any uncertainty on whether the requirement for the filing of a TTRA should still be imposed by the BIR. But the question still needs to be asked: May non-resident income recipients now forego the TTRA filing with the BIR?
We have yet to see the BIR’s response to this recent SC decision in the Deutsche Bank case. To date, Revenue Memorandum Order (RMO) No. 72-2010 has not been revoked or modified, and current rules still do require the filing of a TTRA application before the transaction or the so-called ‘first taxable event.’ However, taxpayers are expecting a definitive response from the BIR that is guided by the SC’s pronouncement that at most, a TTRA “should merely operate to confirm the entitlement of the taxpayer to the relief” under the treaty. Speaking for the court, SC Chief Justice Maria Lourdes P. A. Sereno unequivocably stated that “laws and issuances must ensure that the reliefs granted under tax treaties are accorded to the parties entitled thereto. The BIR must not impose additional requirements that would negate the availment of the reliefs provided for under international agreements.”
It should be noted that the Deutsche Bank ruling does not remove the BIR’s authority to examine the transaction during a tax audit to validate any claim for exemption or preferential treatment under a tax treaty. The BIR certainly can still assess deficiency taxes on the withholding agent or payor of the income if the tax treaty requirements are not met. Depending on the type of income payment, tax treaties do prescribe conditions for non-resident income recipients to qualify for tax benefit, which may either be an exemption or a lower tax rate.
For example, non-residents are exempt from Philippine income tax on profits derived from local sources if they do not have, or are not deemed to have, a ‘permanent establishment’ in the Philippines, as defined in the tax treaty, where such profits may be attributed. Also, the Philippines-Japan Tax Treaty states, for instance, that dividend payments to a resident of Japan is subject to the 10% preferential final withholding tax rate if the said Japanese resident is the beneficial owner of the dividends who holds directly at least 10% of the voting shares of the Philippine company paying the dividends or of the total shares issued by that company, during the period of six months immediately preceding the date of the payment of the dividends. The Philippines-United States (US) Tax Treaty also provides that gains derived by a resident of the US from the sale or transfer of shares of stock in a Philippine company are exempt from capital gains tax (CGT) provided that the property or assets of the local company do not consist principally of immovable property.
The Deutsche Bank case notwithstanding, there may still be certain instances where it is more prudent to consider filing a TTRA with the BIR, which can be made even after availing of the tax treaty benefit. Although not a mandatory requirement, a BIR-approved TTRA will avoid future controversies with the BIR.
For instance, a TTRA may need to be filed when claiming an exemption from CGT on the sale or transfer of unlisted shares of stock in a Philippine company. Revenue Regulations 06-08 in relation to RMO 15-03, as clarified by RMO 37-12, provide that a Certificate Authorizing Registration (CAR) and Tax Clearance Certificate (TCL) must be issued before any sale or transfer of unlisted shares may be recorded in the books of the corporation. The Corporate Secretary cannot record the transfer, cancel the shares of the seller, and issue new shares to the buyer without the requisite CAR/TCL. The CAR and TCL certify that the correct taxes due on the share transfer have been paid to the BIR.
The BIR, however, may not issue the CAR/TCL unless the CGT is paid or a ruling is secured confirming exemption from CGT under the applicable tax treaty. Without an exemption ruling or unless the CGT is paid, the BIR will not issue the CAR/TCL and the share transfer will not be completed. This may cause a lot of problems among the parties to the transaction.
In Deutsche Bank, the Supreme Court has reiterated the well-established international law principle of pacta sunt servanda, or agreements must be kept. The High Court could not have said it any clearer, and now that it has spoken, businesses can at least be assured that privileges bestowed under existing treaties will be fully enjoyed because that is a mutual commitment between us and our treaty partners.
Jonald R. Vergara is a Principal of SGV & Co.
This article 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.