COVID-19 is overwhelming world economies with its sickening effect, literally and figuratively. There is yet no known immunity, even for the strong and mighty.
Countries are forced to close their borders to contain transmission and preserve lives. Regrettably, this situation left people stranded in places outside of their residence or place of employment, which raises a number of cross-border tax issues, such as the inadvertent creation of a permanent establishment (“PE”) and which country gets to tax the employment income of the stranded individual.
Recognizing these issues, the Bureau of Internal Revenue (BIR) set its own rules to alleviate the adverse tax consequences involving cross-border scenarios with the issuance of Revenue Memorandum Circular (RMC) No. 83-2020.
INCOME FROM EMPLOYMENT
Generally, a country has the exclusive right to tax the employment income derived by its resident taxpayers except when the employment is exercised in another country, in which case, that other country will also have a right to tax. The RMC reiterates the available tax exemption on such income by residents of states with which the Philippines has tax treaties. The exemption is available upon meeting certain conditions under the applicable treaty.
Conversely, the Philippines will have the taxing right over the employment income of a foreign individual under any of the following cases:
The employee is present for more than 183 days (more than 120 days for residents of Poland; at least 90 days for US residents) in the Philippines; or
The employer is a resident of the Philippines; or
A non-resident employer has a permanent establishment in the Philippines which bears the remuneration.
One particular area of focus here is the first test which highlights the presence in the Philippines of a foreign national employee. Due to the travel restrictions, a lot of stranded employees have breached the period threshold under the tax treaty.
Fortunately, the BIR will not be strictly applying the treaty provisions. The unintended/stranded days due to COVID-19 travel restrictions will be considered as “force majeure” for purposes of determining the length of stay in the Philippines. Thus, the RMC clarifies that the unintended days that a foreign national spent in the Philippines shall not be counted as “Philippine days,” provided that he or she leaves as soon as the travel restrictions and/or quarantine measures are lifted.
As an illustration, a non-resident alien who was sent by his Singapore employer to work for a Philippine company for 90 days but due to travel restrictions, was stranded in the Philippines for at least 94 more days, will still be eligible for treaty exemption despite accumulating actual Philippine days of more than 183. Given the exceptional nature of his case, the application of the relevant provisions of the Philippines-Singapore Tax Treaty will not be strictly applied, i.e., by disregarding the 94 days of unintended stay. As a result, he will remain a resident of Singapore despite his temporary dislocation.
As a caveat, the RMC states that the Philippines may still tax the employment income if it will appear that he is employed by a domestic company or if his remuneration is borne by a PE of the Singapore employer in the Philippines.
The same is true for a UK resident who went on vacation to the Philippines before COVID and was stranded and forced to work remotely in the country. In this case, the BIR will likewise disregard such period of unintended stay for purposes of counting his Philippine days, provided that he has no other connections to the Philippines and that he should leave the country as soon as circumstances permit.
The RMC provided another illustration where an Indonesian national who is supposed to be assigned to do fieldwork in the Philippines for seven months beginning March 17, 2020, was unable to travel and therefore, remained in Indonesia. Though not working, she received a wage subsidy from her Indonesian employer equivalent to her monthly remuneration. Under the RMC, the employee’s income, including her paid leave, shall be subject to Philippine tax. In this case, the BIR will look at the circumstances that would have occurred had it not been for the travel restriction, i.e., the employee would have already been working in the Philippines.
What is quite odd in this last illustration is that the employee has not even commenced employment yet and the wage subsidy was paid by the Indonesian employer. Shouldn’t the income then be attributed to Indonesia? It appears though that the BIR may have just applied the force majeure principle uniformly regardless of whether the affected travel is inbound or outbound. Perhaps for practicality, this would be the easy, and maybe fair approach. The taxation of the compensation income of the stranded individuals would thus follow what would have been the case had the travel restrictions not been imposed.
While there may be some wisdom to this, I find this quite onerous at this time when everybody is looking for ways to alleviate additional burdens. Perhaps, this wage subsidy (which I assume is part of government stimulus to keep workers on the payroll during the crisis and is not due to the exercise of employment) may be treated differently than compensation income and simply taxed based on residency.
In order to prove the extended presence in the Philippines because of COVID-related travel restrictions, the following documents are required to be maintained and submitted to the BIR in support of a taxpayer’s application for tax treaty relief:
Authenticated sworn certification stating the relevant facts and circumstances of the bona fide presence of the employee in the Philippines;
Duly executed contract/s (must be consularized or apostillized if executed/signed in a foreign country);
Certified true copies of the confirmed booking or flight itinerary for the original and re-booked flights; travel advisory on the cancellation of flight issued by the airline company; the employee’s passport, including blank pages thereof; and
Other documents that the BIR shall deem necessary depending on the circumstances.
As the RMC only addresses issues insofar as treaty countries are concerned, the BIR should likewise provide similar guidelines on the application of domestic law thresholds to minimize unduly burdensome compliance requirements in the context of the COVID-19 crisis. This would be for affected individuals who are not residents of treaty countries.
Like a vaccine showing promising results in clinical trials, the RMC is a step closer in addressing the ill effects of travel restrictions on cross-border taxation.
The PE implications of the travel restrictions due to the COVID situation will be covered in next week’s column.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Raymund M. Gutib is a senior manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
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