BIR RFC Deadline in April: Why it is critical to start preparing as early as January?

The start of January each year marks the beginning of Income Tax Return preparations for all taxpayers who follow the calendar year as their tax period and must file their ITR in April. As they get busy gathering documents and consolidating financial information as well as attending to other annual compliances, they tend to miss another deadline that is also due in April, the Request for Confirmation (RFC), which must be filed in the Bureau of Internal Revenue – International Tax Affairs Division (BIR-ITAD) on or before the last day of April to avail of the tax treaty.

Who needs to file RFC?

The RFC applies to every Philippine taxpayer who transacts with a nonresident foreign corporation or a nonresident alien where the transactions is covered by the tax treaty between the Philippines and the nonresident’s country. In these transactions, the taxpayer acts as the withholding agent and is required to withhold taxes due on the income payments derived by the nonresident from all sources within the Philippines. The withholding agent determines whether to apply the regular tax rates, tax exemptions, reduced rates, or the appropriate provision of the applicable tax treaty.

The RFC must be filed not later than the last day of the fourth month (April) following the close of the taxable year when the income is paid or becomes payable, or when the expense/asset is accrued or recorded in the books, whichever comes first. For capital gains, it is not later than the last day of the fourth month following the close of the taxable year when the income is paid to avoid penalties for late filing. Now, since it takes time to prepare for this, it is always a good practice to start early and allot more time for the filing of the application.

Why is it critical to prepare early?

Characterizing the nature of the income payment

Many taxpayers find it confusing to determine the specific nature of an income payment for the purposes of RFC. This part of the process alone takes time. Proper characterization of the nature of the payment is critical as there are income payments that are subject to preferential tax rates, examples of this are: dividends and interests, royalties, etc. Then there are other payments that are exempted from taxes like: business profits and capital gains. These evaluations, because they tend to be confusing to taxpayers, take time for the taxpayer to accomplish.

Gathering and completing the required documents

There is a checklist of documentary requirements prepared by the BIR to guide taxpayers for each type of income. Together with the application form, the attachments required by BIR for the RFC are the: Tax Residency Certificate (TRC) issued by the nonresident’s country; bank documents as evidence of income payments; and the nonresident’s incorporation documents, among others.

Now, since that these documents must be acquired by the taxpayers from the nonresident, it takes time to deliver these to the Philippines, so it is important the taxpayer request these documents from the nonresident early on.

Authenticating the documents

All the documents secured from the nonresident’s country should be authenticated. To do this, the documents should be apostilled or consularized. The apostillation or consularization process differs per country, thus, it may take weeks or months to prepare. This arduous and time-consuming process should be taken into consideration by the taxpayer when preparing the RFC.

These are just some of the concerns and problems that a taxpayer may experience when preparing RFC. Other difficulties could emerge anytime and anywhere during the preparation; hence, it should not be taken lightly to avoid complications.

Meanwhile, for taxpayers who were previously issued a CoE to the tax treaty are not required to file an RFC for as long as the income paid to the nonresident is of similar nature. This is applicable to taxpayers who, yearly, have similar transactions with nonresident counterparts.

April may seem still far away in January. But any experienced taxpayer knows, and new taxpayers should learn, that preparation is critical because application can be laborious and long. Perhaps one of the priority resolutions that we should keep at the start of each year, as taxpayers, is to be judicious in meeting our deadlines to avoid finding ourselves cramming when the final day of filing comes or worst when we miss it and get ourselves penalized.

By: Bernardino F. De Leon, CPA, and one of the Founders of Bytesfusion Link Solutions Inc. and owner of BFDL Tax and Accounting Services