Global Tax Alert | 31 July 2014

Philippines Tax Court holds tax treaty relief not mandatory

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Executive summary

The Philippine Court of Tax Appeals (CTA) ruled in favor of Masin-AES Pte. Ltd. – Philippine Branch (Masin-AES)1 that its interest payments to AES-Phil. Investment Pte. Ltd. (AES Phil.-Sing) were entitled to the preferential tax treatment under the Philippines-Singapore Tax Treaty (Treaty) irrespective of failure to comply with the requirement of filing a tax treaty relief application (TTRA) within the period specified by the tax authority. The CTA restated the principle laid down in the 2013 Supreme Court decision in Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue (Deutsche Bank)2 which held that imposition of an additional prerequisite for claiming treaty relief would constitute a violation of the duty required by good faith in complying with a tax treaty.3

Background and ruling

On 21 September 2011, Petitioner Masin-AES filed a TTRA with the Philippines Bureau of Internal Revenue (BIR) to confirm that its interest payments to AES Phil-Sing, a Singaporean resident, were eligible for a reduced 15% final withholding tax (FWT) under the Treaty. The Commissioner of Internal Revenue (CIR) issued BIR Ruling ITAD No. 019-12 dated 20 January 2012 denying the 15% FWT rate on interest paid by Masin-AES on or before 21 September 2011, while granting the 15% FWT rate on interest payments made after the date of filing of the TTRA, arguing that to avail of the preferential tax treaty rate, a TTRA must be filed before the first taxable event.

The CIR assessed Masin-AES a deficiency of the 5% rate differential between the 20% domestic law and the 15% under the Treaty. Masin-AES protested the CIR's assessment but the CIR denied the protest. Masin-AES filed a Petition for Review with the CTA.

The CTA held that Masin-AES was correct on withholding the 15% FWT rate on its interest payments to AES Phil.-Sing as the transactions were covered by the Treaty. The CTA ruled that the TTRA was not mandatory for a taxpayer to claim the preferential tax treatment under the Treaty.

Reiterating the principle laid down by the Supreme Court in Deutsche Bank, the CTA stated that the Philippines is bound to comply with its treaty obligations in good faith pursuant to internationally accepted principles. Accordingly, the BIR must not impose additional requirements that would negate the availability of relief provided for under international agreements, more so when the specific tax treaty does not provide for any prerequisite. Further, a TTRA merely operates to confirm the entitlement of the taxpayer to the relief, in this case, the preferential 15% FWT rate on its interest payments to AES Phil.-Sing under the Treaty.

The Supreme Court's precedence in Deutsche Bank, which the CTA followed in this case, negates the ruling of CTA in Mirant (Philippines) Operations Corporation vs. CIR.4 In that case, the CTA ruled that a submission of a TTRA prior to an income payment to a nonresident was mandatory and the failure to comply with the prerequisite caused the taxpayer to be ineligible for the preferential reduced tax treaty rate.


1. Masin-AES Pte Ltd – Philippine Branch vs. Commissioner of Internal Revenue, CTA (2nd Division) Case No. 8543 promulgated 10 April 2014.

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

3. See EY Global Tax Alert, Philippines Supreme Court ruled failure to comply with time requirement for tax treaty relief application should not bar taxpayer from treaty benefit, dated 23 September 2013.

4. Mirant (Philippines) Operations Corporation vs. 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
  • Wilfredo U. Villanueva
    +63 2 894 8180
  • 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
  • Kaz Parsch
    +1 212 773 7201
  • Bee-Khun Yap
    +1 212 773 1816

EYG no. CM4623