On March 28, 2017, the Commissioner of Internal Revenue ("CIR") issued Revenue Memorandum Order No. 8-2017 dated October 24, 2016 ("RMO 8-2017"), which takes effect 90 days after signing.
RMO 8-2017 amends Revenue Memorandum Order No. 72-2010 ("RMO 72-2010") by providing for new procedures in claiming preferential tax treaty benefits on dividend, interest, and royalty income of nonresidents, following a system of self-assessment and automatic withholding of taxes subject to post-reporting validation, in lieu of obtaining a tax treaty relief application ("TTRA") ruling under RMO 72-2010. RMO 72-2010 continues to apply to income other than dividends, interest, and royalties, i.e., the concerned nonresidents are still required to obtain TTRA rulings. The reduced tax rate of 15% applied to intercorporate dividends paid to nonresident foreign corporations under the tax-sparing provision of the National Internal Revenue of 1997, as amended (the "Tax Code") will be covered by a separate issuance.
In order to claim tax treaty relief under RMO 8-2017, the beneficial owner of the income must submit a duly accomplished Certificate of Residence for Tax Treaty Relief ("CORTT") Form to the withholding agent/income payor before the income is paid or credited. The CORTT Form serves as the proof of residency of the nonresident. The income recipient may instead use the prescribed certificate of residency of the country of residence ("prescribed certificate of residency"), but he must still accomplish the CORTT Form, except for Part I(D) (Certification of Competent Authority or Authorized Tax Office of Country of Residence). In this case, the income recipient must attach the prescribed certificate of residency to the CORTT Form submitted to the withholding agent/income payor.
The withholding agent or income payor can withhold at a reduced rate or exempt the nonresident based on the duly accomplished CORTT Form submitted to it. It must timely file the withholding tax returns (BIR Forms 1601-F and 1604CF). It must also submit an original of the CORTT Form (together with the prescribed certificate of residency, as applicable) to the International Tax Affairs Division ("ITAD") of the Bureau of Internal Revenue ("BIR") and to Revenue District Office ("RDO") No. 39 within 30 days after payment of the withholding taxes due on the nonresident's dividend, interest or royalty income based on the applicable tax treaty. Failure to submit a CORTT Form to the withholding agent/ income payor would mean that the nonresident is not claiming any tax treaty relief and, therefore, such income will be subject to the normal tax rate under the Tax Code.
For dividend income purposes, the CORTT Form shall be valid for two years from the date of issuance, unless a prescribed certificate of residency is used, in which case the date of validity of the prescribed certificate of residency will prevail. For interest and royalty income purposes, the CORTT Form shall be valid per contract. The withholding agent must submit an updated Part II of the CORTT Form within 30 days after payment of the withholding taxes in the following cases: (i) if the CORTT Form filed with the ITAD and RDO No. 39 is used for another dividend payment within its prescribed period of validity; and (ii) in case of staggered payment of interest and royalty income.
The nonresident and/or the withholding agent/income payor is noncompliant and ineligible to avail of preferential treaty rates or tax exemption based on any of the following reasons: (i) failure to meet the requirements of the provision of the tax treaty being invoked; (ii) non-filing of BIR Form 1601-F or 1604-CF and non-payment of withholding taxes due as required by the Tax Code; (iii) discrepancy between the information contained in the CORTT Form and the information on BIR Form 1601-F; and (iv) failure to supply accurate and complete information in the CORTT Form and BIR Forms 1601-F and 1604-CF. Noncompliance shall be a ground for the denial of the use of preferential treaty rates and the disallowance of the pertinent expense/s of the withholding agent.
Nonresidents who already filed TTRAs on dividend, interest and royalty income prior to the effectivity of RMO 8-2017 are allowed to use the tax treaty rates invoked based on the applicable tax treaty, subject to compliance check.
Compliance check and post-reporting validation on withholding tax obligations and confirmation of appropriateness of availment of treaty benefits shall be part of the BIR's regular audit investigations conducted by the RDO where the domestic withholding agent is registered.