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Salient changes in tax treaty relief applications

Plagued with incessant appeal for immediate dispatch of applications for tax treaty relief
rulings filed with the International Tax Affairs Division (ITAD) of the Bureau of Internal
Revenue (BIR), the tax authorities recently issued Revenue Memorandum Order (RMO)
72-2010, dated August 25, 2010, which aims to streamline the processing of tax treaty
relief applications (TTRA) and prescribes the documentary requirements for its
application.

The most important feature in this latest BIR issuance is the fixing of period within which
the ITAD should release the ruling. The RMO provides that rulings must be available for
release after 60 working days from the date of receipt of the TTRA or from the date of
the submission of the complete documentary requirements, whichever is later. This is
such a welcome respite from the current state where several complaints from the
taxpayers and tax practitioners had already been raised with respect to unreasonable
delay in the issuance of rulings by the BIR.

Even better, said RMO provides that for TTRAs which have no issue whatsoever as to
the character of the subject income, the ruling should be available for release after thirty
(30) days from the date of receipt of the TTRA or from the date the complete
documentary requirements are received by ITAD, whichever comes later.

Considering that the issuance of the ruling relies on the submission of complete
documentary requirements to ITAD, RMO 72-2010 prescribes a revised TTRA BIR Form
to be filed depending on the nature of the income subject of the tax relief application
(e.g., business profit, royalty, interest, dividends, capital gains, etc.). Aside from the
general documentary requirements which were already prescribed in an earlier issuance
by the BIR, specific documents are likewise required to be attached to TTRA
applications again depending on the nature of the cross-border income payments.
Taxpayers/applicants with incomplete documentary requirements shall be notified by
ITAD and shall be required to comply with the submission of the lacking/missing
documents within a designated period. Failure to do so shall warrant the ITAD to
archive the application without prejudice to the re-filing of the TTRA. Requests for
rulings not accompanied by complete documents shall be considered as no-ruling area
and as such, it shall be deemed as not duly accepted by the ITAD.

The RMO also provides that any application for tax treaty relief which are already filed
with ITAD may no longer be withdrawn by the taxpayer/applicant, including those
applications subjected for archiving. If, in case, the transaction from which the taxable
event occurred is discontinued, the taxpayer/applicant shall be required to inform the
BIR about such fact in order to properly close the application. However, such application
shall not be allowed to be withdrawn, together with the supporting documents already
submitted to the ITAD.

Moreover, the RMO imposes upon the case and review officers to ensure the
confidentiality of the draft ruling or recommendations, wherein they are not allowed to
disclose to any person, the position taken by the BIR on any application. Hence, the rule
on non-disclosure of the stand by the BIR, particularly whether the request will be
granted or denied, together with the earlier rule on non-withdrawal of TRRA already filed
with ITAD should be given utmost consideration before the filing of any application.
Otherwise, a taxpayer/applicant may be stunned by an unfavorable ruling, and left with
no other recourse other than an appeal for review to the Secretary of Finance within 30
days from the receipt of the said adverse ruling.

Lastly, RMO 72-2010 reiterates its earlier declaration under RMO 01-2000, dated
November 25, 1999, that applications for tax treaty relief should be filed before the
transaction. Unlike in RMO 01-2000 where the application is required to be filed at least
fifteen (15) days before the transaction (e.g., payment of dividends, etc.), the latest RMO
does not prescribe a specific number of days for filing provided that it is made before
the occurrence of the first taxable event, which is further described as referring to the
first or the only time when the income payor is required to withhold the income tax
thereon or should have withheld taxes thereon had the transaction been subjected to
tax.. It must be noted, however, that applications based on hypothetical transactions or
future transaction shall be considered as no-ruling area.

The requirement for prior approval under RMO 01-2000 was upheld by the Court of Tax
Appeals in CTA EB No. 40 (June 7, 2005), holding that the availment of a tax treaty
provision must be preceded by an application for a tax treaty relief with ITAD. This
very same CTA decision was sustained by the Supreme Court through a minute
resolution dated February 18, 2008 (GR No. 168531).

What is clear and explicit from the latest RMO therefore is the consistent stance of the
BIR that there should be an application for tax treaty relief prior to the availment of the
preferential rates available in the treaties. This BIR position had been given credence by
the CTA En Banc in its decisions although the said minute resolution by the Supreme
Court is merely a law of the case and does not constitute stare decisis. Until an
unequivocal decision to the contrary by the Supreme Court on this issue, we may be
constrained, for the meantime, to comply with the requirements prescribed by the BIR
under RMO 72-2010.
The author is a senior associate of Du-Baladad and Associates Law Offices (BDB Law).
If you have any comments or questions concerning the article, you can e-mail the author
at deo.saludario@bdblaw.com.ph or call 403-2001 local 320.