Void tax treaty requirements

Part 1

THE Bureau of Internal Revenue (BIR) has taken the stand that a tax treaty relief application must first be filed before availing of the preferential tax rates in several tax treaties, which the Philippines have entered into with other countries.

With due respect, this author believes that this requirement is illegal and is not in conformity with international law. It is not investor-friendly and only adds to the red tape that an investor has to go through in dealing with the government.

A treaty is an agreement under international law entered into by actors in international law such as states. Treaties can be loosely compared to contracts: both are means of willing parties assuming obligations among themselves, and a party to either that fails to live up to their obligations can be held liable under international law for that breach.

The central principle of treaty law is expressed in the maxim Pacta sunt servanda—“Pacts must be respected.” “The obligation to fulfill in good faith a treaty engagement requires that the stipulations be observed in their spirit as well as according to their letter and that what has been promised be performed without evasion, or subterfuge, honestly and to the best of the ability of the party which made the promise.” [Kunz, The Meaning and Range of the Norm (Pacta Sunt Servanda, 29 A.J.I.L. 180 (1945); cited in Freidmann, Lisstzyn, Pugh, International Law (1969) 329]. An interpretation to the contrary would just negate the reason why treaties are entered into by the Philippines with other countries in the first place.

The tax treaties itself do not provide any precondition or prerequisite before the availment of its provisions. For example, Article IX of 2006 Protocol to the 1980 Convention on the avoidance of double taxation between the Philippines and Japan states:

“Article IX

(2) This Protocol shall be applicable:

(a) with respect to taxes withheld at source, for amounts taxable on or after 1st January in the calendar year next following that in which the Protocol enters into force.”

The provisions of the tax treaties therefore must be upheld and respected. With all due respect, a BIR regulation could not and cannot negate the obligations of the Philippines under the tax treaties. The Supreme Court has long upheld the doctrine of Pacta sunt servanda regarding treaty law. (To be continued on Monday.)

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