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407. Tax-treaty Availment JUP 9.12.13

bdb law article, tax treaty availment in the Philippines. Once, again, BDB Law is continuously educating the Philippine public
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  BDB Law’s“Tax Law for Business”  appears in the opinion section of  BusinessMirror  every Thursday. Tax-treaty availment STARTING with the issuance of Revenue Memorandum Order (RMO) 1-2000, the Bureau of Internal Revenue (BIR) had been strictly implementing its requirement that any availment of tax-treaty relief should be preceded by an application for relief from double taxation with theInternational Tax Affairs Division at least 15 days before the transaction. The RMO indicatedthat the reason for this mandate was to avoid any erroneous interpretation and/or application of the treaty provisions before proceeding with the transaction and or paying the tax liabilitycovered by the tax treaty, as well as to avoid the uncertainties and lessen the possibility of disputes with the tax authorities.This order was followed 10 years later by RMO 072-10, which provided guidelines ontheprocessing of tax-treaty relief applications pursuant to existing Philippine tax treaties. Thoughthis RMO does not require the filing of an application at least 15 days before the transaction, itstill requires the filing of an application for tax-treaty relief before the transaction is made.Failure to file the application within the period prescribed shall result in its disqualification, whichconsequently denies the use of lower tax rates or exemptions based on tax treaties.On the strength of theseissuances, the BIR has been denying taxpayers the benefits of preferential tax rates or exemptions available under tax treaties on the ground that noapplication for tax-treaty relief had been filed or that the application was not filed within theprescribed period. This can be seen in a number of rulings issued by the BIR, wheretransactions supposedly covered by tax-treaty provisions were disqualified because thetransactions happened before the applications were filed. Also, some assessments had beenissued and refund claims had been denied on the same ground.   Apparently, judicial decisions had been issued confirming the necessity of a prior application for tax-treaty relief before a taxpayer can avail himself or herself of the preferential tax-treatytreatments provided in the tax treaties. The Tax Court had validated the requirements providedin the RMOs.For various reasons, tax practitioners and taxpayers had been voicing their disagreement over the conditions imposed for the availment of tax-treaty rates. Among these is the principle of pacta sunt servanda. According to the Vienna Convention, “every treaty in force is binding uponthe parties to it and must be performed by them in good faith.” Once a treaty is ratified, itbecomes part of domestic law. Armed with their belief that the conditions provided in the RMOs are not required for theenjoyment of tax-treaty rates, some taxpayers elevated their cases to the Supreme Court.Recently, the High Court promulgated a decision in the case of Deutsche Bank AG ManilaBranch v. Commissioner of Internal Revenue, G.R. 188550, August 19, 2013, involving thisissue on the requirement to comply with the provisions in RMO 1-2000. In this case, the TaxCourt denied the benefit of the preferential tax rate under thetreaty on the ground that theapplication for tax-treaty relief was not filed prior to the availment of the preferential rate, asrequired by RMO 1-2000.The High Court reversed the Tax Court’s decision and held thatthe BIR must not imposeadditional requirements that would negate the availment of relief provided under internationalagreements. The obligation to comply with a tax treaty must take precedence over RMO 1-2000. Taxpayers cannot be deprived of their entitlement to the benefit of a treaty for failure tocomply with an administrative issuance requiring the prior application for tax-treaty relief.This is a welcome development for many taxpayers and investors. Not only is the requirementunder the RMOs not in accordance with our obligations underthe agreements we had signedwith other countries, it is also not favorable to business. Many cross-border transactions hadbeen unnecessarily delayed and some had even been canceled because of the requirement.This important decision of the Supreme Courtplaces the Philippines on a level playing field withthe practices of other countries, insofar as the avoidance of the impact of double taxation oncross-bored transactions is concerned.****The author is a junior associate of Du-Baladad and Associates Law Offices (BDB Law), amember-firm of World Tax Services (WTS) Alliance.The article is for general information only and is neither intended nor should be construed as asubstitute for tax, legal or financial advice on any specific matter. Applicability of this article toany actual or particular tax or legal issue should be supported by a professional study or advice.For comments or questions about the article, e-mail the author at call 403-2001, local 311.
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