More treats from the Treaty Front

By Jocelyn T. Tsang, 19 September 2013

In today's global marketplace, foreign investment helps generate employment, stimulates productivity and competitiveness, transfers skills and technology, develops global value chain linkages and enhances exports. The Philippines, in particular, welcomes and sets a high premium on foreign investments.

In line with the goal of elevating its performance ranking in the global marketplace, the Philippines has repeatedly enhanced its existing double taxation agreements with other countries, allowing it to offer potential foreign investors better opportunities for growth. Briefly, Double Taxation Agreements are meant to promote international trade and investment by ensuring that taxpayers are not assessed for comparable taxes on the same transaction for the same period by two contracting states, as this impedes the development of economic relations between countries. The exchange of tax information afforded by a Double Taxation Agreement also helps tax administrators monitor fiscal performance and revenue collections and fight tax evasion.

Bearing this in mind, and the Philippine government’s efforts to promote tax transparency and international cooperation in tax administration, two tax treaties were signed in the last three months: the renegotiated version of the Double Taxation Agreement between the Philippines and Thailand (RP-Thailand Tax Treaty) on June 21, 2013, and that between the Philippines and Germany (RP-Germany Tax Treaty) on Sept. 9, 2013.Salient features of the modified tax treaties include significant tax breaks as well as tightening of certain thresholds that would constitute a taxable presence in either country (or what is technically called a permanent establishment [PE]). Some of these amendments are provided below.

Under the Renegotiated Philippines-Thailand Tax Treaty:

  • A building site or construction project that exists for a period of more than three (formerly six) months would already constitute a PE.
  • The PE threshold in terms of performance of services by residents of one country within the other country was changed from 183 days to six months within any twelve-month period.
  • The maximum dividend withholding tax rate has been reduced from 20% to 15%, while those directly holding at least 25% equity of the paying company would be entitled to a 10% rate (formerly 15% rate with direct equity ownership of 15% with additional conditions for Thai companies).
  • The treaty now expressly covers stock transaction tax, making it possible for foreign investors to dispose of their shares through the Philippine stock exchange free of any tax.
  • Branch profits remittance tax is also expressly included and capped at a maximum rate of 10%.
  • All interest payments from the Philippines will suffer withholding tax at the general rate of 15%. The lower (10%) rate on interest related to publicly issued bonds, debentures or similar obligations was eliminated.
  • Royalties will now be taxed at a uniform withholding tax rate of 15% regardless of the nature of the royalty payments or status of the licensee.

Under the Renogiated Philippines-Germany Tax Treaty:

  • The 10% withholding tax rate on dividends was lowered to 5% if paid to a company which owns directly at least 70% (formerly 25%) of the capital of the company paying the dividends.
  • Unless otherwise exempted, all interest shall now be taxed at a uniform withholding tax rate of 10% (formerly 15%) of the gross amount of interest received. Financing charges in connection with sale on credit shall not be subject to withholding tax, but shall only be taxable in the country of the seller.
  • Royalties are now to be taxed at a uniform rate of 10% of the gross amount received regardless of the nature of the royalty payments.

Availing of tax treaty benefits

As of the moment, both treaties are still awaiting ratification from the respective countries involved and exchange of diplomatic notes between the contracting parties before the amendments can come into force.As published in this column last week, the Supreme Court has recently overturned the position taken by the Bureau of Internal Revenue (BIR) and the Court of Tax Appeals, with respect to administrative application requirements before treaty relief can be availed. According to the high court, taxpayers who failed to strictly comply with the BIR’s treaty filing requirements should not be unduly prejudiced and stripped of treaty benefits.

For taxpayers with pending applications or issued rulings under the German and Thai treaties, there should be no need to resubmit an application after the amendments under these treaties come into effect. Such treaty relief should be readily available to Thai and German residents who have clearly met the conditions under the respective treaties.Without a doubt, the newly introduced revisions are a welcome development. With more friendly tax rates accorded to foreign investors, we can expect a better churning machinery to generate needed investments for the economy.

The author is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network. 

Views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from such article; the author will be personally liable for any consequent damages or other liabilities.