The lower rate is applied because the broker holds a signed declaration
Maricel DizonEditor, cross-border holdingsThe lower rate is not applied because the holder lives in a treaty country. It is applied because the broker holds a signed declaration of where the holder is resident and that the holder is the beneficial owner of the income. The form is the paper that claims the ceiling, and it is given to the broker, not to a tax office.
The declaration is given to the broker
The form is not sent to a tax office. It is given to the broker, who keeps it on file. The broker is the one who withholds the tax at the moment the dividend is paid, so the broker is the one who needs the declaration. The form tells the broker that the holder is a resident of the Philippines and the beneficial owner of the income.
The broker then applies the lower rate at the moment the dividend is paid. The broker does not decide whether the holder is entitled; the broker relies on the declaration. The declaration is a statement of fact, and the holder is responsible for its truth.
What the declaration says
The declaration says two things: where the holder is resident, and that the holder is the beneficial owner of the income. Residence is the country where the holder lives for tax purposes. Beneficial ownership means the holder is entitled to the income for their own benefit, not as a nominee for someone else.
The form is standardised so the broker can rely on it. The broker does not investigate the holder's residence or ownership; it accepts the declaration. If the declaration is false, the holder has made a false statement, and the consequences are the holder's, not the broker's.
The declaration has a life
A declaration is made as at a date. It is true on the day it is signed, and it may be true for some time after. But residence can change, and beneficial ownership can change. A declaration goes stale, and a broker will ask for it again.
The broker may ask for a new declaration every few years, or when it has reason to think the old one is no longer true. The holder should expect to sign the form more than once. The form is not a one-time event; it is a recurring piece of paper.
A holder who is not entitled does not become entitled by signing
The form does not grant the lower rate. It declares that the holder is entitled to it. A holder who is not a resident of the Philippines or who is not the beneficial owner of the income is not entitled, and signing the form does not change that.
A false declaration is a serious matter. It may result in the broker applying a rate the holder is not entitled to, and the holder may be liable for the tax that was not withheld. The form is a statement of what is already true, not a request for a favour.
Who the form is not given to
The form is not given to a tax office in the Philippines, and it is not given to the US tax authority. It is given to the broker, who keeps it on file. The broker is the withholding agent, and the broker is the one who needs the declaration to apply the lower rate.
The form is not a filing with any government. It is a private declaration between the holder and the broker. The broker may be required to keep it for a certain period, but the holder does not send it anywhere else.
The moment the dividend is paid
The lower rate is applied at the moment the dividend is paid. The broker withholds the tax before the dividend reaches the holder's account. The form must be on file before the payment is made; a form received after the dividend is paid does not change that payment.
The holder should give the form to the broker as soon as possible after opening the account. The form is not retroactive. A dividend paid before the form is on file is withheld at the default rate, and the difference is lost.
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Questions about the two rates
What is the form called?
The form is a standard declaration for claiming treaty benefits. The exact name and number are set by the US tax authority, and the broker will provide the right one for a Philippine resident.
Who do I give the form to?
You give the form to your broker, not to a tax office. The broker keeps it on file and uses it to apply the lower rate when a dividend is paid.
How often do I need to sign it?
A declaration is made as at a date and goes stale. Your broker will ask you to sign a new one when the old one is no longer valid. Expect to sign it more than once.
What if I am not the beneficial owner?
If you are not the beneficial owner of the income, you are not entitled to the lower rate, and signing the form would be a false declaration. The form declares that you are the beneficial owner.
Does the broker check my residence?
The broker relies on your declaration. It does not investigate your residence or beneficial ownership. You are responsible for the truth of what you sign.
The account where a position is opened
Opening an account means holding a contract whose value follows a share price, not the share itself. No share is registered in your name, and no dividend is paid to you as a holder. The account is denominated in a foreign currency, so money sent in pesos passes through one conversion before it becomes a balance.