RP renegotiates 36-year-old tax treaty with US: In heightened campaign vs tax cheats, smugglers

MANILA, Philippines - Finance officials are renegotiating a tax treaty entered into with the United States 36 years ago to avoid double taxation and prevent fiscal evasion as part of the Aquino administration’s heightened campaign against tax cheats and smugglers.

Finance Secretary Cesar Purisima said he had initiated discussions with US Treasury officials on updating the US-Philippines Tax Treaty signed way back in 1976.

“In fact, I just came from the US and we’ve initiated discussions with the US Treasury so that we can update their information sharing agreement between the Philippines and the US that was signed in 1976 as part of our US-Philippines tax treaty,” Purisima told reporters.

The Philippines has entered into several tax treaties for the avoidance of double taxation and prevention of fiscal evasion with respect to income taxes. At present, there are 31 Philippine Tax Treaties in force.

Aside from the US, the Philippines has tax treaties with Australia, Austria, Belgium, Brazil, Canada, China, Denmark, Finland, France, Germany, Hungary, Indonesia, India, Israel, Italy, Japan, Korea, Malaysia, the Netherlands, New Zealand, Norway, Pakistan, Romania, Russia, Singapore, Spain, Sweden, Switzerland, Thailand, and the United Kingdom.

The Finance chief pointed out that the Philippines continue to interact with regulators outside the country to make sure proper taxes are paid and that governments are not shortchanged.

“The other thing we’re doing is we’re reaching out to our fellow regulators outside the country. These are all important steps to improve further our ability to catch tax evaders and smugglers,” he stressed.

Multilateral lender International Monetary Fund (IMF) earlier encouraged the Philippines to forge additional bilateral tax treaties with other countries to attract foreign direct investments (FDIs).

Under the treaties, the business profits of a resident of another country with whom the Philippines has a tax treaty are taxable in the Philippines only if the resident has a permanent establishment in the Philippines to which the profits are attributable.

For one, profits remitted by a branch of a foreign corporation to its home office are taxed at the rate of 15 percent while dividends declared by a domestic corporation to its foreign parent are generally taxed at 30 percent. If the home country of the recipient corporation allows an additional credit of 17 percent as tax deemed paid in the Philippines, the tax is reduced to 15 percent.

Under the Philippine tax treaties with other countires, a preferential tax of 10 percent on branch profit remittances is granted. Furthermore, under the tax treaties with these countries, dividends paid are subject to 10 percent tax if the payor-subsidiary is registered with the Board of Investments (BOI) or if the beneficial owner of the dividends is a company which holds a certain percentage of the capital of the payor-subsidiary.

The Aquino administration has revived the government’s campaign against high profile tax evaders and smugglers through Operation RATE (Run After Tax Evaders) and RATS (Run After The Smugglers) that were put on the back burner by former Finance Secretary Margarito Teves.

The Finance department vowed to plug tax leakages as foregone revenues due to tax cheats reached an alarming level of P250 billion instead of introducing new tax measures including the imposition of higher excise tax on sin products particularly cigarettes and alcohol products.

The Aquino administration is bent on trimming the budget deficit to two percent of GDP (gross domestic product) starting 2013 from the current level of 3.9 percent of GDP.