Guidelines on MFN Clause in US-Philippines Tax Treaty

IBM World Trade Corporation and International Business Machines Corporation sought tax refunds on alleged overpaid royalties.
The BIR’s January 21, 1992 ruling denied the claim, clarifying that the MFN clause did not apply because royalties paid under the Philippines-Germany Treaty involved matching tax credits, unlike those under the Philippines-U.S. Treaty.
Therefore, a U.S. resident taxpayer could not claim the reduced 10% royalty tax rate given to Germany because the tax situations were not similar.

The correct tax rate for royalties derived from the Philippines and paid to U.S. residents is either 15% if the payer is a Board of Investments registered corporation engaged in preferred activities, or 25% for all other cases.
The reduced 10% rate provided under the Philippines-Germany Treaty does not extend to U.S. residents due to the lack of a corresponding foreign tax credit for the latter.

All previous BIR rulings allowing the application of the MFN clause to royalties paid to U.S. residents were revoked effective January 21, 1992.
These revocations are not retroactive to protect taxpayers’ interests, per Section 246 of the Tax Code, which prohibits retroactive application if prejudicial to taxpayers.

Taxpayers who relied on prior rulings but did not withhold correct tax amounts are considered deficient from the date of incorrect withholding.
Such taxpayers are required to amend their withholding tax returns and pay the correct taxes without penalties by October 30, 1992.
After October 30, 1992, failure to comply results in assessments including penalties.

The International Tax Affairs Division will monitor taxpayers’ compliance through verification programs.
Taxpayers paying the correct taxes before the deadline must submit proof of payment and the amended returns within five working days.

All pending claims for tax credits or refunds related to the MFN clause on royalties paid to U.S. residents are automatically denied as of the date of the circular.

The guidelines are based on the ruling of the Commissioner of Internal Revenue, dated July 1, 1992.
The policy reflects the legal interpretation of Article 13, Section 2(b)(iii) of the Philippines-U.S. Tax Treaty and related provisions of the Philippines-Germany Tax Treaty.
Section 246 of the Tax Code governs the prohibition on retroactive application of tax rules when prejudicial to taxpayers.