BIR releases rules on TRC issuance

MANILA, Philippines — The Bureau of Internal Revenue (BIR) has released the guidelines on the issuance of Tax Residency Certificates (TRC) to prevent unqualified taxpayers from availing of tax treaty benefits.

Internal Revenue Commissioner Caesar Dulay issued Revenue Memorandum Order 51-2019, dated July 8, prescribing the guidelines and procedures for the processing and issuance TRCs, and mandating the creation of a database of Philippine residents with foreign-sourced income.

TRCs are secured by Philippine residents deriving income from sources within the jurisdiction of a contracting state, intending to avail of the preferential tax treatment under the effective tax treaties of the Philippines.

Dulay said the RMO was issued in light of incidences where taxpayers sought to obtain tax treaty benefits even though they are not qualified.

For one, the BIR’s International Tax Affairs Division (ITAD) said it has received applications from resident aliens and resident foreign corporations claiming to be Philippine residents for treaty purposes so as not to be taxed on their income derived from another state.

This is despite the BIR’s delimitation, which states that only resident citizens and domestic corporations are considered residents for treaty purposes in the Philippines, as only they are subject to tax on their worldwide income.

The BIR clarified that resident aliens and resident foreign corporations are regarded as residents for domestic tax purposes, and not for treaty purposes, as they are only taxed on their income from Philippine sources.

 “Thus, the need to clarify, through the issuance of this Revenue Memorandum Order (RMO), who are considered ‘residents of a contracting state,’” Dulay said.

Moreover, the ITAD has observed that Philippine residents with foreign-sourced income applying for TRCs have been submitting spurious contracts, billing statements, receipts or invoices or any proof of transaction, so as not to reveal the true nature and amount of their income abroad.

“Therefore, in order to regulate the issuance of TRCs and prevent any misuse or abuse thereof, the bureau deems it necessary to issue this RMO,” Dulay said.

Under the memorandum, all applicants engaged in trade or business or practice of profession must be registered with the BIR under a regular Tax Identification Number (TIN).

“TRCs are issued on the basis of tax residency in the Philippines of the applicant. The burden of proving the fact of residency, pursuant to effective and applicable tax treaties, rests upon the applicant,” the memo read. 

“In determining whether or not a taxpayer is a resident of a contracting state, consideration must be given to the taxpayer’s liability to tax in the country of residence so that only taxpayers subject to comprehensive liability to tax or full tax liability are considered residents,” it said.

The BIR said the ITAD would no longer accept TRC applications of resident aliens, including pensioners, and resident foreign corporations upon the effectivity of the RMO.