Overview of the Application of Tax Treaties (TTRA) in the Philippines

When a Japanese parent company, as a non-resident of the Philippines, receives Philippine-sourced income from a Philippine corporation, that income is subject to taxation in the Philippines, and withholding tax is imposed by the Philippine corporation. At the same time, the same income is also taxable in Japan, resulting in double taxation between the two countries. To eliminate such double taxation, a Japan–Philippines tax treaty has been concluded. By filing a Tax Treaty Relief Application (TTRA), the withholding tax imposed by the Philippine corporation can be reduced or exempted under the treaty.

In this section, we will provide an overview of the Japan–Philippines tax treaty and the procedures for its application.

Reduced Tax Rates under the Japan–Philippines Tax Treaty

As of now, the Philippines has entered into bilateral tax treaties with 43 countries, including Japan. The Japan–Philippines tax treaty between the two countries was amended at the end of 2008, and the new tax rates have applied since January 1, 2009, as follows.

Types of Income Payments	Withholding Tax Rates under Tax Law	Tax Rates under the Japan–Philippines Tax Treaty
Business Profit	25%	Exempt from Tax
Interest	20%	10%
Divident	25%	10% (or 15%)
Royalties	25%	10% (or 15%)
Royalties for the Use of Machinery and Equipment	7.5%	–
Capital Gains	15%	Exempt from Tax
Remittance of Profits from Branch to Head Office	15%	10%

In order to apply the tax rates under the Japan–Philippines tax treaty mentioned above, a TTRA application is required. If the proper procedures are not followed, the applicable treaty rates may not be granted.

Overview of TTRA Applications

The rules regarding TTRAs are frequently updated, and RMO No. 14-2021, published on March 31, 2021, is the most current ruling as of now.

Under this ruling, two methods are provided:

1. Withholding at the treaty rate at the time of payment – The withholding agent applies the tax rate under the tax treaty and submits an RFC (Request for Confirmation) to the BIR’s ITAD (International Tax Affairs Division).
2. Withholding at the statutory tax rate at the time of payment – The recipient of the income later files a TTRA application and requests a refund.

In either method, the documents specified below and in RMO No. 14-2021 must be submitted.

Overview of the TTRA Application Procedure

First, the income recipient must submit the application form (BIR Form 0901), a tax residency certificate issued by the tax authority, and relevant provisions of the tax treaty to the income payer. These documents must be provided before the first payment of income so that the income payer can determine whether the tax treaty benefits can be applied.

If the withholding agent applies the tax treaty rate to the income of the recipient (method ①), the withholding agent must submit an RFC to the BIR by the last day of the fourth month following the end of each taxable year. If the RFC is approved by the BIR, a confirmation certificate is issued. However, if the BIR determines that the rate applied in withholding was lower than the correct treaty rate, a denial of the RFC will be issued, and the withholding agent must pay the underpaid tax and any applicable penalties.

On the other hand, if the statutory tax rate is applied (method ②), the income recipient must file a TTRA application after receiving the income to demonstrate eligibility for the tax treaty rate. If the application is approved, the income recipient may request a refund for any overpaid tax within two years from the date the income was received.

If a TTRA application is denied, the taxpayer may appeal to the Department of Finance (DOF) within 30 days of receiving the denial notice.

Required Documents

A. General Required Documents

1. Request Letter
2. BIR Form 0901 (Application Form, by type of income)
3. Tax Residency Certificate (TRC) issued by the Japanese tax authority
4. Bank documents proving the income payment
5. Withholding tax returns and Alpha List
6. Documents proving payment of withholding tax
7. Notarized Special Power of Attorney (SPA)
8. English translation of the Articles of Incorporation (with Apostille)
9. Certificate of Non-Registration issued by the SEC

B. Documents Required by Type of Income
Business Income

1. Contracts related to the business
2. Special Power of Attorney (SPA)
3. Sworn Certification
4. Certificate of travel history issued by the Immigration Bureau or passport
5. Certificate of Completion for the project
6. Invoice or similar document issued by the income recipient

Dividends

1. Board resolution approving the dividend
2. Certification under oath from the corporate secretary or equivalent
3. Copy of the previous year’s audited financial statements (Certified True Copy)
4. General Information Sheet (GIS)
5. Proof that the Philippine permanent establishment and shareholding are independent

Interest

1. Loan agreement
2. Proof of loan remittance (bank deposit certificate / remittance advice, etc.)
3. Proof that the Philippine permanent establishment and the loan are independent
4. Evidence that the interest rate is at an Arm’s Length Rate (if the borrower and lender are related parties)

Royalties

1. License agreement
2. Proof of ownership of the licensed products, patents, copyrights, trademarks, trade names, etc.
3. Proof that the Philippine permanent establishment and the rights related to the royalties are independent

In this way, filing a TTRA requires preparing various documents based on an understanding of the transactions and relevant provisions that form the basis for applying the tax treaty. Some documents may need certification or an Apostille from the Philippine Embassy, which creates certain responsibilities on the Japanese side. Additionally, it may be necessary to provide supplementary information to assist the BIR’s ITAD in making its determination. Due to the complexity of the procedures and the risk of differing interpretations of the applicable tax rate, it is advisable to start the process early.

Our firm also provides TTRA application services, so please feel free to consult with us.