BIR eases tax residency rules for foreign employees

MANILA, Philippines — The Bureau of Internal Revenue (BIR) has eased the tax residency rules for foreign employees who are forced to extend their stay in the Philippines due to travel restrictions amid the coronavirus pandemic.

BIR Commissioner Caesar Dulay issued BIR Revenue Memorandum Circular 83-2020, dated Aug. 17, addressing the international tax issues related to cross-border workers who are stranded or quarantined in the country and the unintended creation of permanent establishment of foreign companies in the Philippines.

“Due to continuing implementation of measures to prevent COVID-19, treaty provisions will not be strictly applied to mitigate potential tax burdens related to compliance with certain reporting and filing obligations, and the satisfaction of tax-related conditions,” Dulay said.

“Whether a taxpayer is a resident for tax purposes is a question of fact that requires consideration of all surrounding circumstances. Each case will be assessed and evaluated independently based on factual and unaltered evidence,” he said.

According to the circular, an individual who is prevented from leaving the Philippines as a result of travel restrictions will not be regarded as being present in the Philippines for tax residence purposes for the period after their original scheduled date of departure.

“The bureau will consider this as ‘force majeure’ for the purpose of establishing such individual’s tax residence, provided that he or she leaves the Philippines as soon as the circumstances would permit, such as when the travel restrictions and/or quarantine measures have been lifted,” it said.

Under the effective tax treaties of the Philippines with other countries, the residence state has an exclusive right to tax the employment income derived by its resident taxpayers, except when the employment is exercised in another contracting state.

If employment is exercised in the country, the employment income will not be subject to local tax if the employee has not been present in the Philippines for more than 183 days (more than 120 days for residents of Poland and at least 90 days for residents of the US) in aggregate in the year of income, fiscal year, calendar year, or any twelve-month period.

They are also not subject to Philippine taxes if their remuneration is paid by an employer that is not a resident of the Philippines; and if his wage is not deductible against the profits of a permanent establishment which the foreign employer has in the Philippines.

Meanwhile, the circular also clarified the rules on the unintended creation of permanent establishment of foreign enterprises as a consequence of the extended stay of their employees in the Philippines.

“In all cases where restrictions imposed by COVID-19 affect the applicability of Philippine tax laws and tax treaties on a taxpayer’s tax position, records shall be maintained outlining the circumstances and submitted to the bureau in support of the taxpayer’s application for relief from double taxation,” the BIR said.

The concerned individual or company is required to submit relevant documents to prove that the extended presence in the Philippines was due to COVID-related travel restrictions.