PHILIPPINES Law and Practice Contributed by: Carina Laforteza, Joanna Marie Joson, Kristina Paola Frias and Joanna Marie Reyes, SyCip Salazar Hernandez & Gatmaitan
4. Taxation of Inbound Investments 4.1 Application of Withholding Taxes Interest, dividends and royalties earned by non-resi - dent aliens not doing business in the Philippines are subject to FWT of 25%. Interest and royalties earned by non-resident foreign corporations are subject to FWT of 25%. Interest on foreign loans received by non-resident for - eign corporations is subject to FWT of 20%. Dividends earned by non-resident foreign corpora - tions are generally subject to FWT of 25%. This rate is reduced to 15% if the country of domicile of the non- resident foreign corporation allows a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 10%, which represents the difference between the RCIT rate of 25% and the 15% tax rate on dividends. This is referred to as tax sparing credit. 4.2 Key Treaty Jurisdictions for Inbound Investment The Philippines is a party to tax treaties with 44 coun - tries. There is no public data available showing which tax treaty countries are primarily used by investors to make investments in Philippine corporate stock or debt. 4.3 Tax Authority Scrutiny of “Treaty Shopping” Practices The Bureau of Internal Revenue (BIR) requires the sub - mission of documents to ascertain whether an entity applying for tax treaty relief is entitled to the preferen - tial tax rates under an applicable tax treaty. Before the payment of the income, the non-resident deriving income from Philippine sources (eg, interest, dividends, royalties) must submit a prescribed appli - cation form for treaty purposes, a tax residency cer - tificate duly issued by the foreign tax authority, and the relevant provision of the applicable tax treaty to the payor of the income or the withholding agent in order to avail itself of the preferential treaty rates for these incomes. The withholding agent may apply the preferential tax treaty rates upon submission of the
required documents by the non-resident, subject to the filing of a request for confirmation with the BIR on the propriety of the withholding tax rate applied on the income. Failure to provide the required docu - ments may result in the imposition of withholding tax using the regular rates prescribed under the Philippine Tax Code. If the regular rate under the Tax Code was applied on the income instead of the preferential treaty rates, the non-resident income recipient may file a tax treaty relief application and a claim for refund with the BIR to prove its entitlement to the treaty benefit. 4.4 Transfer Pricing Issues for Inbound Investors Based on the BIR’s transfer pricing guidelines, intra- firm or interrelated transactions continue to account for a substantial portion of the transfer of goods and services in the Philippines, but the revenue collection from related-party groups continues to decrease. The BIR has attributed this to the fact that related compa - nies are more interested in their net income as a whole rather than as separate entities. To address this, the BIR issued transfer pricing audit guidelines, which are applicable to controlled transactions between related parties where at least one party is subject to tax in the Philippines by prescribing methods for establishing arm’s length prices. The BIR also issued regulations to ensure that proper disclosures of a related-party transaction are made and that these transactions are conducted at arm’s length. The BIR amended these regulations to stream - line the procedure for submission of the disclosure form, transfer pricing documentation and other sup - porting documents by providing safe harbours and materiality thresholds. 4.5 Challenges to Related-Party Limited Risk Distribution Arrangements The transfer pricing regulations recognise that an appraisal of the risk is important in determining arm’s length prices or margins. Only those risks that are eco - nomically significant in determining the value of trans - actions or margins of entities will be identified and used in the comparability analysis to be conducted in applying the arm’s length principle.
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