Pursuant to income tax treaties entered into between the Philippines and other countries, non-Philippine residents are entitled to either exemption from Philippine income tax or preferential income tax rates on income derived from Philippine sources. The tax treaties specify the conditions under which a non-Philippine resident may invoke the benefits granted by the treaty.
Given this, is it still necessary to obtain a ruling from the Bureau of Internal Revenue (BIR) confirming that the non-Philippine resident is entitled to the benefits under the treaty?
The BIR will say yes. It has in fact issued Revenue Memorandum Order 72-2010. Under the RMO, a tax treaty relief application (TTRA) must be filed before the “first taxable event”; failure to properly file the TTRA within the period prescribed will have the effect of disqualifying the TTRA. Section 14 states:
. . .Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurence of the first taxable event.
Failure to file the TTRA with the ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA under this RMO.
Refusing entitlement to tax treaty relief simply because the applicant failed to file within the prescribed period is certainly a tough penalty imposed on a person who is otherwise entitled to avail of the benefits of the income tax treaty. After all, the an income tax treaty has the force and effect of law and is self-executing. One wonders why it is even necessary to file an application for tax treaty relief. If the taxpayer believes that he is entitled to tax treaty relief, then he should be allowed to invoke the treaty, subject to a post-audit by the BIR (who may impose penalties and surcharges if it is subsequently discovered that the taxpayer erred in invoking the tax treaty). The requirement of filing a TTRA is another form of bureaucracy which can be eliminated. Instead of evaluating TTRAs, the BIR can perhaps devote its resources to something else.