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A close look at Deutsche Bank case by: Chelmarie V.

Collado

IN Philippine jurisdiction, foreign individuals and corporations are taxed on all


consider the existence of a tax treaty between the Philippines and the home country
of the foreign individual or corporation.

A tax treaty is an agreement that provides for a uniform treatment of a taxable event
between agreeing countries. The Supreme Court (SC) explained the purpose of a tax
treaty in the case of Commissioner of Internal Revenue (CIR) v. SC Johnson and
Sons, Inc., G.R. No. 127105 (June 25, 1999): it is used to reconcile the national
fiscal legislations of the contracting parties in order to help the taxpayer avoid
international juridical double taxation. Double taxation is the imposition of
comparable taxes in two or more states on the same taxpayer in respect of the same
subject matter and for identical periods.

On Jan. 4, 2000, the Bureau of Internal Revenue (BIR) issued Revenue


Memorandum Order No. (RMO) 01-2000, which provides for the procedure in
claiming the benefits of a tax treaty. RMO 01-2000 requires that any availment of
the tax treaty relief must be preceded by an application with the International Tax
Affairs Division (ITAD) at least 15 days before the transaction. RMO 072-2010,
which amended RMO 01-2000, provides that failure to file the tax treaty relief
application within the period prescribed shall result in its disqualification. Thus,
under RMO 01-2000 and 072-2010, although a taxpayer is entitled to the benefits of
a tax treaty, it must follow the procedural requirements in order to claim the benefits.
The BIR has been consistently denying Tax Treaty Relief Applications (TTRA) on
the grounds of non-compliance with these procedural requirements.

In the case of Deutsche Bank AG Manila Branch v. CIR, G.R. 188550 (Aug. 19,
2013), the SC scrutinized and ruled on these procedural requirements. In this case,
Deutsche Bank withheld and remitted to the BIR its 15% branch profits remittance
tax (BPRT) on its regular banking unit net income remitted to Deutsche Bank
Germany. Believing that it overpaid its BPRT, Deutsche bank filed its administrative
refund with the BIR, and on the same date, it filed its TTRA with ITAD for the
confirmation of its entitlement to the preferential tax rate of 10% under the RP-
Germany Tax Treaty. Subsequently, Deutsche Bank filed its judicial claim for
refund on the ground of inaction of the BIR on its administrative claim.
The Court of Tax Appeals (CTA) denied the benefit of the preferential tax rate
provided under the RP-Germany treaty on the grounds that Deutsche Banks TTRA
was not filed at least 15 days prior to the availment of the preferential rate, as
required by RMO 01-2000.

However, the SC reversed the CTAs decision on the ground of pacta sunt servanda.
Pacta sunt servanda requires that agreeing parties should comply with their treaty
obligations in good faith. It held that the period of application of tax treaty as
required by RMO No. 01-2000 should not operate to divest entitlement to the relief
as it would constitute a violation of the doctrine of pacta sunt servanda. The
obligation to comply with a tax treaty must take precedence over RMO 01-2000.

The SC further explained that taxpayers cannot be deprived of their entitlement to


the benefit of a treaty for failure to strictly comply with an administrative issuance
requiring the prior application for tax treaty relief. According to the SC, at most, the
application for a tax treaty relief from the BIR should merely operate to confirm the
entitlement of the taxpayer to the relief.

The BIR filed a Motion for Reconsideration of the SCs decision on the Deutsche
Bank case; but, the SC denied the motion with finality. Thus, the SC decision on the
case has become final and executory.

In light of the SCs ruling on the Deutsche Bank case, it is clear that the BIR cannot
outright deny a TTRA based solely on the taxpaye rs non-compliance with the 15-
day period requirement before the availment of the relief. This ruling invalidated the
rule stated in RMO 072-2010, which provides that failure to file the tax treaty relief
application within the prescribed period shall result in its disqualification.

In the Deutsche Bank case, the SC did not rule on the validity of the requirement
that a TTRA must be file with ITAD in order to claim the benefits, but it ruled that
prior application is not required to claim such benefit.

However, in its decision, the SC made a strong pronouncement that the BIR must
not impose additional requirements that would negate the availment of relief
provided under international agreements. Considering that the crux of the
controversy in the case was the validity of 15-day prescribed period of application,
this statement, nevertheless, admits different interpretations: first, the non-filing of
TTRA with ITAD will not negate the right of the tax payer to claim the relief from
a tax treaty; and second, filing of TTRA is still required but the BIR cannot outright
deny the application because it was not filed within the period prescribed.

Considering that the main issue in the Deutsche Bank case was the non-filing of the
taxpayer within 15 days prior to the transaction, and it is a fact that the validity of
requiring a TTRA to be filed with ITAD was not expressly touched by the SC, the
statement that TTRA filed with ITAD is merely confirmatory on the entitlement of
the tax payer is considered as an obiter dictum.

In People v. Macadaeg, G.R. No. L-4316, (May 28, 1952), obiter dictum is defined
as an opinion uttered by the way, not upon the point or question pending, as if
turning aside from the main topic of the case to collateral subjects. Hence, the
foregoing statement of the SC is not final and conclusive because it is merely obiter
dictum. On the contrary, the SC did not expressly state that TTRA is not anymore
required in order to claim the entitlement. Thus, under this interpretation, the
taxpayer must still file a TTRA with ITAD in order to claim under a tax treaty
benefit, but it is not required to file such application prior to the transaction.

DEUTSCHE BANK AG MANILA BRANCH v. COMMISSIONER OF


INTERNAL REVENUE, G.R. No. 188550, August 19, 2013

Taxation; Treaties prevail over administrative issuances. A state that has contracted
valid international obligations is bound to make in its legislations those
modifications that may be necessary to ensure the fulfillment of the obligations
undertaken. Thus, 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. More so, when the RP-Germany Tax Treaty
does not provide for any pre-requisite for the availment of the benefits under
said agreement.

Application for tax treaty relief merely confirms entitlement to the relief. [T]he
period of application for the availment of tax treaty relief as required by RMO No.
1-2000 should not operate to divest entitlement to the relief as it would constitute a
violation of the duty required by good faith in complying with a tax treaty. The denial
of the availment of tax relief for the failure of a taxpayer to apply within the
prescribed period under the administrative issuance would impair the value of the
tax treaty. At most, the application for a tax treaty relief from the BIR should merely
operate to confirm the entitlement of the taxpayer to the relief.

Full text here.

Indeed, the Deutsche Bank case provided a breakthrough in claiming tax treaty
benefit. Taxpayers do not need to file their TTRA at least 15 days before the
transaction. However, since taxpayers may misinterpret the doctrine of the case as
regards the filing or non-filing of a TTRA for the availment of a benefit from a tax
treaty, the BIR must provide clear cut administrative guidelines. The BIR must
update its administrative regulations in order to reflect the new pronouncement in
the Deutsche bank case and to provide specific guidelines in claiming tax treaty
applications.

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