Tax notes: Effect of late TTRA filing on FWT refund claims

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Monday, April 28, 2014


THE fact that the taxpayer filed his tax treaty relief application (TTRA) belatedly - that is, before filing an administrative claim for a refund - should not preclude the taxpayer from enjoying tax treaty benefits or lead to the denial of the application for refund of its overpaid final withholding tax (FWT).

Under Revenue Memorandum Order (RMO) No. 1-2000 (which was prevailing at the time of the transaction), any availment of tax treaty relief should be preceded by an application for tax treaty relief with the Bureau of Internal Revenue International Tax Affairs Division (BIR-ITAD) at least 15 days before the transaction, i.e., payment of dividends, royalties, etc., accompanied by supporting documents justifying the relief.

In light of the Supreme Court decision in the case of Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue (GR 188550, August 19, 2013), the Court of Tax Appeals (CTA) held that the taxpayer’s failure to file the TTRA prior to the transaction should not deprive it of the benefit of a tax treaty. Citing the Deutsche Bank Case, the CTA held that non-compliance with the prior application rule should not operate to divest entitlement to the tax treaty relief as it would constitute a violation of the duty required by good faith in complying with a tax treaty and would impair the value of the tax treaty (Sal Oppenheim Jr. & CIE Kommanditgesellschaft Auf Aktien v. Commissioner of Internal Revenue, CTA EB No. 906, March 3, 2014).

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The CTA further explained that the underlying principle of prior application with the BIR becomes moot in refund cases where the very basis of the claim is erroneous or where there is excessive payment arising from non-availment of a tax treaty relief.

The taxpayer cannot be faulted for not complying with RMO No. 1-2000 prior to the transaction. It could not have applied for a tax treaty within the prescribed period precisely because it erroneously paid the tax not on the basis of the preferential tax rate under the applicable tax treaty, but on the regular rate as prescribed by the Tax Code. Hence, the prior application requirement becomes illogical. The fact that the taxpayer invoked the provisions of the tax treaty when it requested for confirmation before filing an administrative claim for a refund should be deemed substantial compliance with the RMO.

Published in the Sun.Star Cebu newspaper on April 29, 2014.

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