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  • Tax Obligation of A Permanent Establishment - FDD 11 3 16

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    This document discusses the tax obligations of permanent establishments (PEs) of foreign corporations in the Philippines. It explains that a PE is created when a foreign corporation conducts business through a fixed place of business in the Philippines, such as a branch office. While the tax court has ruled that a foreign corporation with a PE should still be treated as a non-resident foreign corporation (NRFC) and pay taxes through withholding, the Bureau of Internal Revenue (BIR) has issued conflicting rulings, with some stating PEs should register and pay taxes like resident foreign corporations (RFCs). The author believes PEs should be treated as RFCs and comply with tax obligations, and that the BIR should provide uniform guidelines for

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    Tax Obligation of a Permanent Establishment

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    544. Tax Obligation of a Permanent Establishment - FDD 11 3 16

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    This document discusses the tax obligations of permanent establishments (PEs) of foreign corporations in the Philippines. It explains that a PE is created when a foreign corporation conducts business through a fixed place of business in the Philippines, such as a branch office. While the tax court has ruled that a foreign corporation with a PE should still be treated as a non-resident foreign corporation (NRFC) and pay taxes through withholding, the Bureau of Internal Revenue (BIR) has issued conflicting rulings, with some stating PEs should register and pay taxes like resident foreign corporations (RFCs). The author believes PEs should be treated as RFCs and comply with tax obligations, and that the BIR should provide uniform guidelines for

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    87 views2 pages

    Tax Obligation of A Permanent Establishment - FDD 11 3 16

    Uploaded by

    pierremartinreyes
    This document discusses the tax obligations of permanent establishments (PEs) of foreign corporations in the Philippines. It explains that a PE is created when a foreign corporation conducts business through a fixed place of business in the Philippines, such as a branch office. While the tax court has ruled that a foreign corporation with a PE should still be treated as a non-resident foreign corporation (NRFC) and pay taxes through withholding, the Bureau of Internal Revenue (BIR) has issued conflicting rulings, with some stating PEs should register and pay taxes like resident foreign corporations (RFCs). The author believes PEs should be treated as RFCs and comply with tax obligations, and that the BIR should provide uniform guidelines for

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    of 2

    BDB Law’s “Tax Law for Business” appears in the opinion section of Business Mirror every Thursday.

    Tax Obligation of a Permanent Establishment

    A foreign corporation is a corporation that is organized under the laws other than that of the
    Philippines. For income taxation purposes, a foreign corporation may either be classified as
    resident foreign corporation (RFC) or a non-resident foreign corporation (NRFC). RFC applies to
    a foreign corporation engaged in trade or business within the Philippines. On the other hand,
    NRFC applies to a foreign corporation not engaged in trade or business within the Philippines.

    The income taxation of RFC and NRFC in the Philippines are essentially the same. Both are
    subject to Philippine income taxes only with respect to income derived from sources within the
    Philippines and both are not subject to income taxes on income derived from sources outside
    the Philippines. The only difference is that the NRFC is subject to income tax at the rate of 30%
    on gross income while the RFC is, in general, subject to income tax at the rate of 30% on net
    taxable income, except when a special tax regime applies. Consequently, the RFC is required to
    file its income tax return and pay its own taxes. On the other hand, the NRFC shall not be
    required to file an income tax return. Its taxes are paid through the final withholding tax system.
    The payment of taxes of the NRFC, if any, is the responsibility of the payor/customer as
    withholding agent.

    While that is based on our domestic law, there is also the concept of a permanent establishment
    (PE) found in various tax treaties concluded by the Philippines with other countries. As defined
    in most treaties, PE means a fixed place of business in the Philippines in which the business of
    a foreign enterprise is wholly or partly carried on. There are various instances where a PE may
    be considered to have been established. Among these are the presence of a place of
    management; a branch; an office; a factory; the presence of employees, agents or
    representatives in the Philippines for defined number of days and depending on the extent or
    nature of activities pursued in the Philippines; etc. When a foreign enterprise carries on
    business in the Philippines through a PE, the income that is attributable to that PE is subject to
    income tax in the Philippines.
    The presence of a branch office of a foreign entity is one of the instances that results in the
    creation of PE. Apparently, a foreign corporation that is issued by the Philippine Securities and
    Exchange Commission a license to transact business in the Philippines though a branch is
    considered a resident foreign corporation. Thus, doing business in the Philippines through a
    branch makes the foreign corporation a resident. As such, a branch is also required to register
    with the tax bureau and comply with all the filing and reportorial requirements with the said
    office, including the payment of its own taxes.

    There are, however, other forms of PEs which involve activities with short-term durations but
    sufficient to create a PE. May these be considered RFCs or NRFCs? Can they register with the
    tax bureau so that they can comply with their tax obligations as RFCs or will they remain as
    NRFCs and pay their taxes through the final withholding tax system?

    In one case (C.T.A. Case No. 6388, August 22, 2005), the Tax Court ruled that a foreign
    corporation with a PE is still treated as NRFC .for income taxation purposes. In this case, the
    Court took note of the fact that the foreign corporation was not issued a license to transact
    business in the Philippines by the SEC and neither was it registered with the BIR and paid its
    taxes. Accordingly, the withholding of final tax by the Philippine customer/payor was proper.

    The BIR, on the hand, had issued conflicting rulings. There are a number of rulings confirming
    that the payments to a foreign corporation with a PE in the Philippines are subject to the final
    withholding tax. This notwithstanding, there are more recent rulings holding that a foreign
    corporation that has created a PE in the Philippines is treated as a foreign corporation engaged
    in trade or business in the Philippines otherwise known as an RFC. As such, they should pay
    their taxes like any RFC. Accordingly, they should be able to secure TIN and register as
    taxpayer. There is, however, no specific guideline provided for the registration of a PE so that it
    can comply with its tax obligations. In one ruling, it was stated that the foreign corporation may
    register using the business address of its permanent establishment. In another ruling, it is
    implied that the one-time TIN secured from RDO 39 as generally required for all foreign entities
    will suffice.

    We believe that .a foreign entity with a PE should be treated as resident foreign corporation,
    considering that to some extent, it is doing business in the Philippines. As such, it should
    comply with its tax obligation like any regular or special branch of a foreign entity. However,
    since it is not registered with the SEC, perhaps the tax authority should consider crafting a rule
    providing uniform guidelines for the registration of PEs and payment of their taxes.

    ******

    The author is a senior partner of Du-Baladad and Associates Law Offices (BDB Law), a member
    firm of World Tax Services (WTS) Alliance.

    The article is for general information only and is not intended, nor should be construed as a
    substitute for tax, legal or financial advice on any specific matter. Applicability of this article to
    any actual or particular tax or legal issue should be supported therefore by a professional study
    or advice. If you have any comments or questions concerning the article, you may e-mail the
    author at [email protected] or call 403-2001 local 310.

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