Non-compliance with the prior application for tax treaty relief should not operate to divest entitlement to the tax treaty relief.

Taxpayer entered into an agreement with a corporation based in the United States. In the said agreement, taxpayer was granted the exclusive right to use the trademarks and other intellectual property rights of the US corporation. For the royalties paid based on the agreement, taxpayer had been withholding final withholding tax at the rate of 30%. Realizing that the royalty payment is entitled to a preferential tax rate of 10% under the Philippines – US Tax treaty, taxpayer filed for a refund of the excess withholding tax payments. The BIR argued, among others, that the taxpayer is not entitled to the preferential tax treaty rate since it failed to file an application for Tax Treaty Relief as required under RMO No. 72-10. Citing the case of Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue1 , the Court ruled that non-compliance with the prior application rule as required by RMO No. 1- 2000 (latest is RMO 72-10) should not operate to automatically divest entitlement to the tax treaty relief as it would constitute a violation of the duty required by good faith in complying with a treaty and would impair the value of the treaty. (Philip Morris Philippines Manufacturing, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 8692, June 30, 2015)