How to Claim Foreign Tax Credit to Lower Your Tax Liabilities

Contrary to popular belief, double taxation is legal in the Philippines. But do not worry, the law and the BIR have provided ways in order for its citizens to minimize the effects of double taxation which may be either in the form of tax exemption or preferential tax rates.

Resident citizens and domestic corporations are taxed on their Philippine and Foreign-sourced income and as a given, income from other countries is taxed in the country it was derived.

Thankfully, some countries have an international tax treaty with the Philippines giving citizens of both countries a chance to lower their overall tax liabilities.

Related: How to File Income Tax Return in the Philippines: A Beginner’s Guide

 

Limitations of foreign tax credits.

The tax treaty relief for foreign taxes is in the form of deductions or foreign tax credits for tax paid in the country income was derived. The allowable credits vary from country to country and are based on the country’s Double Taxation Agreement (DTA) with the Philippines.

 

How can I avail of the benefits of tax treaties?

As per the BIR requirement, the resident taxpayer must submit a Certificate of Residency (COR) to the tax authority of the foreign jurisdiction to prove that he is a resident of the tax treaty partner of the said foreign country.

Certificate of Residency Requirements for Individuals.

1. Letter Request with the following information:

  • Name of the applicant;
  • The taxable year being applied for;
  • The total amount of income received or expected to be received by the applicant;
  • Name of the non-resident income payor and its country of residence; and
  • Reason for the request;

Note: If any of the above information is not applicable, such fact shall be stated as well as the reason or legal/factual basis therefor;

2. Proof of Transaction (e.g. contract, agreement, details of pensions to be received abroad, etc.);

3. Tax Identification Number;

4. Barangay Certification stating therein the exact address and length of residency of the applicant;

5. Certified photocopy of all the pages of applicant’s passport showing the dates of arrival and departure of the applicant in the Philippines (including blank pages thereof);

6. A notarized affidavit stating the length or duration of stay of the applicant in the Philippines during the taxable year being applied for based on the dates of arrival in and departure from the Philippines stamped on the passport or summary of the number of days in the Philippines;

7. For pensioners, a notarized affidavit stating that he/she has no income from sources within the Philippines, if applicable;

8. Original Copy of Special Power of Attorney (SPA) or letter authorizing a representative of the applicant to file and/or claim the COR; and

9. Proof of income in the form of:

Related: What is the difference between BIR Form 1701 and BIR Form 1701A?

 

Additional Requirements if Applicant is an Individual Engaged in Business.

  • A certified true copy of BIR Form 2303;
  • Certificate of Partnership Registration, if applicable;
  • Certified true copy of BIR Form 0605 as proof of payment of annual registration fee;
  • All quarterly ITRs (BIR Form 1701Q) duly filed during the year of the transaction;
  • Audited Financial Statements.

 

Additional Requirements if Applicant is a Resident Alien.

  • Alien Certificate of Registration issued by the Bureau of Immigration and any other proof of permanent residency in the Philippines; and
  • Special Retiree’s Visa Identification Card issued by the Philippine Retirement Authority, if any.

 

Certificate of Residency Requirements for Corporati0ns.

1. Letter Request with the following information:

  • Name of the applicant;
  • The taxable year being applied for;
  • The total amount of income received or expected to be received by the applicant;
  • Name of the non-resident income payor and its country of residence; and
  • Reason for the request;

Note: If any of the above information is not applicable, such fact shall be stated as well as the reason or legal/factual basis therefor;

2. Proof of Transaction;

  • Contract/Agreement; and
  • BIR registered principal and supplementary receipts (invoice, billing statement, statement of account, debit/credit memo, purchase order, official receipt, job order, etc.

5. A certified true copy of Articles of Incorporation/Articles of Partnership;

6. Certified copy of Certificate of Registration;

7. Certified copy of BIR Payment Form No. 0605 for the payment of annual registration fee;

8. Audited Financial Statements;

9. Original Copy of Special Power of Attorney (SPA) or letter authorizing a representative of the applicant to file and/or claim the COR;

10. All quarterly ITRs duly filed during the year of the transaction;

11. BIR Form No. 1702-RT or BIR Form No. 1702-MX, whichever is applicable.

 

Notes.

The letter-request must be addressed to:

The Office of the Legal Service
Bureau of Internal Revenue

Attention:

Chief, International Tax Affairs Division
Room 811, NOB-BIR, Agham Road, Diliman
Quezon City 1101

The BIR reserves its right to require the presentation of the original copies for verification purposes or to request additional information or any related document which may be deemed necessary in the processing of the COR.

Go back to the main article: An Ultimate Guide to Philippine Tax: Types, Computations, and Filing Procedures

 

About the Author.

Miguel Dar is a CPA and an experienced tax consultant who specializes in tax audits. He provides tax advice to various start-up enterprises and clarified tax concerns of individual taxpayers. This includes assisting clients in registering their businesses, tax and bookkeeping training for start-up businesses, settling open cases, tax planning for future tax compliance and answering tax-related inquiries. Connect with him on Linkedin.