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J.A. Villanueva, CPA
PREFERENTIAL TAXATION: DOUBLE TAX AGREEMENTS
TREATY
Double taxation, otherwise described as "direct duplicate taxation",
happens when two taxes are imposed on the same subject matter,
for the same purpose, by the same taxing authority, within the same
jurisdiction, during the same taxing period; and the taxes must be of
the same kind or character.
A treaty is an agreement under international law entered into by
actors in international law, namely sovereign states and international
organizations. A treaty may also be known as an (international)
agreement, protocol, covenant, convention, pact, or exchange of
letters, among other terms. Regardless of terminology, all of these
forms of agreements are, under international law, equally considered
treaties and the rules are the same.
Modes of eliminating double taxation:
1. Tax Deduction - an amount subtracted from the gross income
to arrive at taxable income.
2. Tax Credit- an amount subtracted from an individual's or
entity's tax liability (tax due) to arrive at the tax liability still
due.
• A deduction differs from a tax credit, in that a deduction
reduces taxable income while a credit reduces tax
liability.
• Under the Expanded Seniors Citizens Act of 2003, the
20% discount shall be considered as a tax deduction not
as a tax credit.
3. Treaties with other states: a tax treaty sets out the
respective rights to tax of the state of source (situs) and the
state of residence with regard to certain cases, an exclusive
right to tax is conferred on one of the contracting states;
however, for other items of income or capital, both states are
given the right to tax, although the amount of tax that may be
imposed by the state of source is limited.
CPA Reviewer in Taxation: Tabag
The Tax Reviewer: Soriano, Manuel, Laco
DOUBLE TAXATION AGREEMENTS
A Tax Treaty (also called double tax agreement, or DTA) is an
agreement made by two countries to resolve issues involving double
taxation of passive and active income. Tax treaties generally
determine the amount of tax that a country can apply to a taxpayer's
income and wealth.
In the Philippines, all DTAs are bilateral. At present, there are
a total of 41 countries with which the Philippines has an existing DTA.
Tax conventions, such as the RP-US Tax Treaty, are drafted
with a view towards the elimination of international juridical double
taxation.
Relevant Revenue Issuances
Related Laws
National Internal Revenue Code as Amended
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J.A. Villanueva, CPA
Income items normally covered by tax treaties: Generally, tax
treaties cover relief from double taxation on the following types of
income:
1. Business Profits;
2. Profits from Shipping and Air Transport;
3. Dividend Income;
4. Interest Income;
5. Royalty Income;
6. Capital Gains;
7. Income from Services; and
8. Other Income Earnings.
ILLUSTRATION:
Y SK is a company organized and existing under the laws of South
Korea, holds 40% of Y PH's outstanding stocks. Y PH pays dividends
quarterly and accordingly Y JP receives 40% of the declared
dividends.
Under the Tax Code, dividends earned by a non-resident foreign.
corporation like Y SK is subject to 30% Final Tax, except if the tax
sparing rule applies and the same may be reduced to 15%. However,
under Art. 10
the RP-Korea Tax Treaty, the applicable rates are: a) 10 per cent of
the gross amount of the dividends if the beneficial owner is a
company (other than a partnership) which holds directly at least 25
per cent of the capital of the company paying the dividends; and b)
25 per cent of the gross amount of the dividends in all other cases.
CPA Reviewer in Taxation: Tabag
The Tax Reviewer: Soriano, Manuel, Laco
Based on the above provision, the applicable rate on the dividends
received by Y SK from Y PH would be 10% since it owns 40% of Y
PH's outstanding stocks.
MOST FAVORED NATION CLAUSE
The purpose of a most favored nation clause is to grant to the
contracting party treatment not less favorable than that which has
been or may be granted to the most favored among other countries.
The most favored nation clause is intended to establish the principle
of equality of international treatment by providing that the citizens
or subjects of the contracting nations may enjoy the privileges
accorded by either party to those of the most favored nation, The
essence of the principle is to allow the taxpayer in one state to avail
of more liberal provisions granted in another tax treaty to which the
country of residence of such taxpayer is also a party provided that
the subject matter of taxation, in this case royalty income, is the
same as that in the tax treaty under which the taxpayer is liable.
PROCEDURAL REQUIREMENTS OF THE BIR IN THE AVAILMENT
OF TAX TREATY RELIEF BENEFITS:
PROCEDURE UNDER RMO No. 14-2021:
1. The non-resident taxpayer availing of the tax treaty benefits
must furnished the withholding agent of the BIR Form NO.
0901 or Application Form for Treaty Purposes and the Tax
Residency Certificate (TRC).
2. The withholding agent will file with the ITAD a request for
confirmation on the propriety of the withholding tax rates
applied on the item of income. On the other hand, if the regular
rates have been imposed on the said income, the non-resident
Relevant Revenue Issuances
Related Laws
National Internal Revenue Code as Amended
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3.
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J.A. Villanueva, CPA
shall file a Tax Treaty Relief Application (TTRA) with the ITAD,
together with the documentary requirements (under Sec. 5 of
RMO No. 14-2021).
The deadline for the filing thereof shall be any time after the
payment of withholding tax but in no case later than the last
day of the fourth month following the close of each taxable
year.
One TTRA or request for confirmation shall be filed for each
transaction except for long-term contracts, or those effective
for more than a year, where an annual updating shall be made
until termination of the contract.
New TTRAS shall be processed within 4 months from the
submission of complete documents or as soon as practicable
provided that the ITAD has addressed all its backlogs.
All documents executed in a foreign country must either be
authenticated by the Philippine Embassy or apostilled,
whenever applicable.
In case of denial or adverse ruling, the taxpayer may file an
appeal with the Department of Finance within 30 days from
receipt thereof.
3. Where the rate of tax imposed under the domestic law is lower
than the rate imposed under the tax treaty, the lower rate
under the domestic law shall prevail.
In Case of Conflict Between Tax Treaty and Domestic Laws:
1. As a general rule, the provisions of the Philippine Tax Code
(domestic law) shall apply on the income, gain or profit of any
person liable to income tax.
2. In case of conflict between the provisions of a tax treaty and
domestic law, the provisions of the tax treaty generally prevail
over the provisions of the domestic law.
CPA Reviewer in Taxation: Tabag
The Tax Reviewer: Soriano, Manuel, Laco
Relevant Revenue Issuances
Related Laws
National Internal Revenue Code as Amended