Global Tax Alert | 23 September 2013

Philippines Supreme Court ruled failure to comply with time requirement for tax treaty relief application should not bar taxpayer from treaty benefit

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Executive summary

The Supreme Court of the Philippines ruled in favor of Deutsche Bank AG Manila Branch1 (DB Branch) and held that the failure to strictly comply with the domestic law requirement under Revenue Memorandum Order (RMO) No. 1-2000 to file a tax treaty relief application (TTRA) 15 days prior to the transaction should not deprive a taxpayer of the benefit of a tax treaty. The transaction in this case is the remittance of the branch profits to DB Branch's German head office, which would give rise to branch profits remittance tax (BPRT).

Background and ruling

On 21 October 2003, DB Branch remitted after-tax branch profits to its German head office using the 15% BPRT pursuant to the Philippines' domestic Tax Code. On 4 October 2005, DB Branch filed with the Bureau of Internal Revenue (BIR):

  • A refund claim or issuance of a tax credit certificate (TCC) for the difference between the 15% BPRT that it had paid in 2003, and the 10% BPRT rate under the Philippines-Germany Income Tax Treaty (Treaty); and
  • A request for confirmation of its entitlement to the 10% BPRT rate under the Treaty.

On 18 October 2005, DB Branch filed a Petition for review with the Court of Tax Appeals (CTA) reiterating its claim for refund or issuance of a TCC for the overpayment of BPRT. The CTA denied the refund on the ground that the TTRA was not filed with the BIR International Tax Affairs Division (ITAD) 15 days prior to the payment of the BPRT and actual remittance of the branch profits to Germany. Citing the Mirant case2, the CTA ruled that a submission of a TTRA prior to the payment was mandatory; accordingly, failure to comply with the prerequisite caused the taxpayer to be ineligible for the preferential reduced tax treaty rate.

The Supreme Court disagreed and allowed the refund or issuance of the TCC based on the following grounds:

  • Every treaty in force is binding upon the parties, and obligations under the treaty must be performed by them in good faith. Further, treaties have the force and effect of law in the Philippines.
  • Each State's domestic laws must ensure that the reliefs granted under a given income tax treaty are available to the parties who are entitled to such reliefs. The BIR should not impose additional requirements that would negate availability of the reliefs provided for under the treaty. Further, the Philippines-Germany Tax Treaty does not include any prerequisite for claiming benefits under the Treaty.
  • The 15-day period for filing the TTRA under the domestic law should not deter entitlement to the tax treaty provision/benefit, since to do so would constitute a violation of the duty required by good faith in complying with a tax treaty. At most, the TTRA should merely operate to confirm the entitlement of the taxpayer to the relief under the treaty, not denial solely due to failure to produce it.
  • The obligation to comply with a tax treaty must take precedence over the domestic law. Noncompliance with tax treaties has negative implications on international relations, and unduly discourages foreign investors.
  • In refund cases, the prior TTRA requirement becomes illogical where the very basis of the claim for refund is erroneous or excessive payment arising from non-availability of the tax treaty rate. Section 229 of the Tax Code provides the taxpayer a remedy for tax recovery when there has been an erroneous payment of tax. The outright denial of DB Manila's claim for refund solely due to failure to apply for tax treaty relief prior to the payment of the BPRT would defeat the purpose of Section 229.


1. Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue, G.R. No. 188550, promulgated 19 August 2013.

2. Mirant (Philippines) Operations Corporation v. Commissioner of Internal Revenue, C.T.A. EB No. 40 and subsequent Supreme Court affirmation, G.R. No 168531, 12 November 2007 and 18 February 2008.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Philippines (SGV & Co.), Makati City
  • Emmanuel C. Alcantara
    +63 2 894 8149
  • Ma. Fides A. Balili
    +63 2 894 8113
  • Fidela T. Isip-Reyes
    +63 2 894 8204
Ernst & Young LLP, Asia Pacific Business Group, New York
  • Chris Finnerty
    +1 212 773 7479
  • Jeff Hongo
    +1 212 773 6143
  • Kaz Parsch
    +1 212 773 7201
  • Bee-Khun Yap
    +1 212 773 1816

EYG no. CM3814