With the new year having just arrived, we can look forward to another year of exciting challenges and opportunities. For taxpayers following the calendar year as their tax period, the start of the new year marks the countdown for the April income tax deadline. While this is the most popular deadline for these taxpayers, we should not forget that there is also another BIR requirement that is due in April – the Request for Confirmation (RFC) to avail of tax treaty relief on certain income payments.
As a refresher, what should a taxpayer be reminded of regarding the RFC?
The RFC applies to taxpayers who have transactions with nonresidents and whose transactions are covered by an existing tax treaty between the Philippines and the country of such nonresidents. Examples of these transactions include business profits, dividend income, or interest income, among others.
The RFC is required to be filed with the Bureau of Internal Revenue’s (BIR) International Tax Affairs Division (ITAD), and the prescribed time for filing is not later than the last day of the fourth month following the close of the taxable year when the income is paid or becomes payable, or when the expense/asset is accrued or recorded in the books, whichever comes first (for capital gains, it is not later than the last day of the fourth month following the close of the taxable year when the income is paid or when the transaction is consummated). Thus, for taxpayers following the calendar year, they have until the last day of April 2023 (adjusted in consideration of weekend and holiday) for their transactions in 2022.
While the above deadline is still more than three months, the needed preparation for the filing of the application should be done ahead of time. Otherwise, late filing will merit penalties on the part of the taxpayer.
What are the usual hurdles in preparing the documents for the RFC? Here are some examples:
1. Evaluation by the applicant-taxpayer as to the characterization of the income payment
Determining the particular nature of an income payment for purposes of RFC filing is sometimes confusing for the taxpayer. The characterization of such nature is important as there are income payments that are subject to preferential tax rates, like royalties, dividends and interests, and there are those that are exempt from taxes like business profits and capital gains.
Sometimes, taxpayers find it hard to evaluate the contracts that they have. As an example, for software transactions – Is it business profit? Is it royalty income? Then, for transactions falling under business profit, there is another evaluation, whether there is a permanent establishment or not in the Philippines. These are just some of the preliminary evaluations that may take time for the taxpayer.
2. Completing the long list of required documents
The BIR has issued a checklist of documentary requirements for each type of income. Aside from the application form for the RFC, included in the required attachments to the application form are the Tax Residency Certificate (TRC) issued by the nonresident’s country, bank documents evidencing the income payments, and the nonresident’s incorporation documents, among others.
Considering that several documents must be acquired from the side of the nonresident, it may take some time to deliver the same to the Philippines, so it is advisable to request the documents from the nonresident ahead of time.
3. Apostillation/consularization process
Related to completing to the required documents as mentioned above, the documents to be secured from the nonresident’s country should be authentic. As proof of authenticity, the documents should be apostilled/consularized. Please note, that the apostillation/consularization process varies per country, and such could take a few weeks to a few months to prepare.
Thus, needless to say, the timing of apostillation/consularization process should be determined at the onset in the preparations to file the RFC.
Aside from those mentioned earlier, there are other hurdles that the taxpayer applicant may be met with in the preparation of RFC; hence, the preparations should not be taken lightly.
While a taxpayer is required to file the RFC for its applicable transactions, taxpayers who were already previously issued a COE to the tax treaty benefit are generally no longer required to file an RFC, provided that there is an income of similar nature paid to the same nonresident. This is very helpful for those taxpayers who have similar transactions with their counterpart-nonresidents yearly.
As we know, planning and preparation are the foundations of accomplishing any goal. Let’s start our new year right by being prudent in preparing to meet our deadlines, which include the deadline for the RFC. Otherwise, we might see ourselves cramming for our April deadlines.
Let's Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
As published in BusinessWorld, dated 17 January 2023
