The possibility of double taxation is an issue not just for corporations with globalized presence and operations but also for individuals who earn income and perform services from and for different employers in different countries. This issue will grow even more as an increasing number of employers offer permanent work-from-home options to their employees and prospective job applicants, which allows for an employee to work full-time for one company while being physically located outside the country, for most of a taxable year.
In light of this, the provisions of the Revenue Memorandum Order or RMO 14-2021 are worth revisiting regularly, if only to remind ourselves that we have the option of availing of treaty benefits to stop the mechanism of double taxation from taking away our precious earnings/income, especially for the individual.
In 2021, the Bureau of Internal Revenue issued RMO 14-2021 to settle at once all issues relating to the availment of treaty benefits and to deliver efficient service to taxpayers. Sec. 3 thereof provides that the said RMO shall cover all items of income derived by non-resident taxpayers from Philippine sources that are entitled to relief from double taxation under the relevant tax treaty.
Depending on the treaty provision existing between two countries or “contracting states” as is usually called in the tax treaties, an income payment to a non-resident may either be subject to the regular rates or the preferential treaty rates or even exempt from income tax.
RMO 14-2021 operationalizes how the payor of the said income is to treat the taxes due from the said income in the tax scenario. Under the said issuance, the payor or withholding agent may rely on the submitted BIR Form 0901 or Application Form for Treaty Purposes, Tax Residency Certificate duly issued by the foreign tax authority, and the relevant provision of the applicable tax treaty on whether to apply a reduced rate of or exemption from, withholding at source on the income derived by a nonresident taxpayer from all sources within the Philippines.
When the treaty rates have been applied by the withholding agent on the income earned by the nonresident, the former shall file with the BIR International Tax Affairs Division, a Request for Confirmation on the propriety of the withholding tax rates applied on that item of income. On the other hand, if the regular rates have been imposed on the said income, and the payee believes a lower tax rate should be applied, the income payee shall file a Tax Treaty Relief Application with the BIR ITAD. In both cases, the application should be supported by the documentary requirements enumerated in the said RMO.
The period to file the RFC or TTRA, whichever is applicable, varies. For RFC, the same shall be filed by the withholding agent at any time after the payment of withholding tax but shall in no case be later than the last day of the fourth month following the close of each taxable year. While the filing of the TTRA depends upon the nonresident who must invoke and prove his/her/its entitlement to treaty benefit.
When the treaty rates have been applied by the withholding agent on the income earned by the nonresident, the former shall file with the BIR International Tax Affairs Division.
Note, however, that one possible flaw in the RMO, is the fact that should the BIR later on determine that the withholding tax rate applied by the withholding agent is lower than the rate that should have been applied on an item of income under the treaty, the BIR will deny the RFC and the withholding agent shall then be required to pay the deficiency tax plus penalties.
Considering the potential penalties involved should the wrong rate be applied, most withholding agents, to be safe, would likely not accede to the use of treaty rates, but instead, use the regular tax rates. Thus, putting the burden on the non-resident to apply with the BIR ITAD for the TTRA.