Tax treaties and their impact on work-from-anywhere set up

It’s undeniable that the COVID-19 pandemic has changed the world of business. COVID-19 has forced us all to rethink what’s possible. It triggered far more remote working scenarios and removed many of the challenging barriers employees saw previously. As a result, companies and employees adopt the work-from-anywhere arrangement to embrace the new normal.

The dislocation of employees raises immediate concerns about the tax compliance impact on companies and employees. Companies have identified employees who have been displaced or are working remotely for an extended period to evaluate the potential tax implications brought about by remote working arrangements.

As work-from-anywhere scenarios expand to include work-from-home in the country of employment, working in a different country where an affiliated entity already exists, working in a third location where no affiliated entity exists, and cross-border recruitment from abroad, a more complex cross-border tax assessment and planning becomes necessary. Thus, multinational companies and impacted employees depend heavily on tax treaties to claim relief from potential double taxation.

The Bureau of Internal Revenue (BIR) has recently issued Revenue Memorandum Order (RMO) 14-2021 regarding the availment of treaty benefits to provide tax relief from double taxation. Under the RMO, for remuneration derived from the provision of dependent personal services, the following are the specific requirements to be submitted in addition to the general requirements to avail of the tax treaty exemption under the relevant tax treaty:

1. Employment contract duly executed by the foreign employer and the foreign employee.

2. Contract between the foreign employer and the domestic taxpayer allowing the temporary assignment of the foreign employee in the Philippines.

3. Secondment agreement duly executed by the foreign employer and the foreign employee-secondee.

4. Certification duly issued by the Bureau of Immigration, which shall state the dates of arrival in and departure from the Philippines of the foreign employee or his/her passport booklet.

The prescribed application form is BIR Form 0901-S2, which should be submitted along with the required attachments to the International Tax Affairs Division (ITAD) of the BIR. The request for confirmation shall be filed by the withholding agent at any time after the payment of withholding tax, but shall in no case be later than the last day of the fourth month following the close of each taxable year. The filing of Tax Treaty Relief Applications (TTRAs) largely depends on the nonresident, who must invoke and prove his/her/its entitlement to treaty benefit. The nonresident may, at any time after the receipt of income, file a TTRA to prove entitlement to treaty benefits. Failure to prove the same may result in the confirmation of the tax rate previously applied on the income, and in the eventual denial of the TTRA.

The RMO provides guidance and procedures on how to avail of the tax treaty exemption under the dependent personal services provision of the tax treaty if the payor of the remuneration is a resident employer. However, it has no mention of the application of tax treaty relief by a nonresident foreign payor/employer paying remuneration to an employee who is entitled to personal services exemption under the tax treaty. Let’s take, for example, a Singapore-based company that intends to deploy a Singapore national employee for a role in its subsidiary based in the Philippines for a period of six months. The employee will work remotely in Singapore during the assignment and his/her remuneration will be paid and borne by the Singapore entity. Since the TTRA should be filed by the withholding agent (payor of the remuneration), the Singapore company (non-resident foreign payor/employer) cannot apply for the TTRA as it is not constituted as a withholding agent and due to lack of clarity on applicability.

As many foreign national employees with no constituted Philippine withholding agents are affected by the work from anywhere arrangement, it would be beneficial for them and their employers if there will be clear guidance on how to apply for the tax treaty relief and obtain a certificate confirming their entitlement to treaty benefits to support their tax treaty exemption claims.

Maria Ruby Rea-Vergara is a director from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email [email protected].