For taxpayers following the calendar year as their tax period, the start of the new year marks the countdown to the April income tax deadline. While this is the most pressing deadline for most taxpayers, we should not forget that there is also another BIR requirement due in April — the Request for Confirmation (RFC) to avail of tax treaty relief on certain income payments.
What should taxpayers be aware of regarding the RFC?
The RFC applies to taxpayers who transact with nonresidents and whose transactions are covered by a tax treaty between the Philippines and the nonresident’s country. Examples of these transactions include business profits, dividend income, or interest income.
The RFC must 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 (allowing for weekends and holidays) for their 2022 transactions.
While the above deadline is still more than three months away, preparations to file the application should be done ahead of time in order to avoid penalties for late filing.
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 taxpayers. The characterization of the 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 their contracts. Are software transactions booked as business profit? Royalty income? For transactions falling under business profit, there is another evaluation involved, having to do with whether the transaction party maintains a permanent establishment in the Philippines. These are just some of the preliminary evaluations that may take time for the taxpayer.
2. Completing the 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 multiple documents must be acquired from the nonresident, it may take some time to deliver these to the Philippines, so it is advisable to request the documents from the nonresident ahead of time.
3. Apostillation/consularization process
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, the timing of apostillation/consularization should be determined at the onset in preparations to file the RFC.
Aside from these, other hurdles could emerge in preparing the RFC; hence, the preparations should not be taken lightly.
While a taxpayer is required to file the RFC for applicable transactions, taxpayers who were 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 in April.
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.
Jan Lorenzo S. Fevidal is an associate from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.