Connecting Countries with Tax Treaties

As featured on PhilStar:  Connecting countries with tax treaties

In today’s fast-paced and technology-driven world, connections can be made in an instant. Sharing content, clicking links from the internet, or simply liking a picture in any social media platform may lead to a conversation between two or more people. These simple interactions have the potential to evolve into deeper, more meaningful relationships. However, establishing connections is not just limited to building personal relationships. They also play a crucial role in shaping communities and society on a larger scale.

The Philippines has long recognized the importance of fostering strong and positive relationships with other nations to advance its political, economic, and cultural interests. To further strengthen its diplomatic relations with other countries, the Philippines has been proactive in entering into treaties, such as Double Taxation Agreements (DTAs) or tax treaties. As of date, the Philippines has about 44 signed tax treaties with countries such as Japan, China, Korea, the United States of America, and the United Kingdom. Towards the end of last year, the Philippines also started negotiations with Lao People’s Democratic for a DTA between the two countries.

But how do DTAs work and what benefits can we acquire from them? Primarily, DTAs are made to set guidelines in relation to the taxation of cross-border income earned by the taxpayers from countries with a DTA. Without such guidelines, income earned by the taxpayers may be taxed by both source treaty country (i.e., where income is earned) and residence treaty country. In addition, tax treaties may include provisions emphasizing the exchange of tax information between different countries which ensures that the optimal tax compliance can be attained by the taxpayers. Tax treaties also enhance international relationships by creating a more stable tax environment that encourages establishment of foreign trade and investment activities.

Notably, DTAs also aid in attracting foreign investments through the preferential tax treaty rates available in such agreement between countries. Foreign business enterprises from countries with a DTA with the Philippines can benefit from them since tax liabilities may be mitigated when they do business in the Philippines. In general, DTAs identify the specific types of income streams that may be subjected to preferential treaty rates, such as, but not limited to:

1. Business Profits;
2. Royalties;
3. Interests;
4. Dividends;
5. Capital Gains or gains acquired from personal properties;
6. Compensation for services.

For example, under the National Internal Revenue Code, as amended, a non-resident foreign corporation (NRFC) is liable for a final withholding tax of 20% for interest payments on foreign loans. However, in certain DTAs, such as the DTA between the Philippines and Japan, a 10% preferential tax treaty rate may be availed by the non-resident foreign corporation for interest income provided that the recipient is the beneficial owner of such interest payments. For NRFCs earning income from Philippine sources, the preferential rates may be enjoyed by applying for either a Tax Treaty Relief Application (TTRA) or Request for Confirmation (RFC) with the Bureau of Internal Revenue-International Tax Affairs Division (BIR-ITAD) under Revenue Memorandum Order (RMO) No. 14-2021.

The primary benefit of DTAs can be seen through the availment of preferential tax treaty rates that effectively lower the costs and tax risk for enterprises. In the pursuit of building connections between the Philippines and other nations, it is paramount that forging foreign ties through tax treaties will not only be a symbolic gesture, but it will also provide opportunities for businesses in the Philippines to strengthen our economy in the years to come.