IMPACT OF COVID-19 RESTRICTIONS ON TAX RULES
By: Atty. Euney Marie Mata-Perez on October 22,2020
Quarantine measures imposed by governments that restrict travel and movement because of the Covid-19 pandemic do not only affect economies, but also tax rules.
In taxation and international tax treaty rules, the number of days a taxpayer or its employees and agents stay in a country could be crucial in determining tax status, taxability or tax exemption.
Under our National Internal Revenue Code of 1997, as amended (Tax Code), a nonresident alien who stays in the Philippines for an aggregate period of 180 days in any calendar year shall be considered as such doing business in the country and shall be taxed in the same manner as an individual citizen and a resident alien.
In most income tax treaties, ordinary income generated by a resident of one treaty country in another would generally not be subject to income tax in the latter country if that income is not attributable to a permanent establishment (PE) there. A PE is generally a fixed place of business with some degree of permanency, through which the business of an enterprise is wholly or partly conducted. It includes a branch, office, warehouse or factory. It also includes a seat of management. In some income tax treaties, a PE would arise if the nonresident taxpayer performs some services or has a construction activity for more than a certain period, such as180 days in a calendar year, in that other country.
Also, the compensation income of a foreign employee working in another state may not be subject to tax if he or she does not stay there for more than a certain period.
Mindful of the Covid-19-caused travel restrictions, the Secretariat of the Organization for Economic Co-operation and Development (OECD) released the OECD Secretariat Analysis of Tax Treaties and the Impact of the Covid-19 Crisis on April 3, 2020.
Also, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) 83-2020 on August 17 to tackle the taxpayer’s residency status and PE creation due to the aforementioned restrictions.
On the change in the residence status of individuals
The OECD Secretariat Analysis provides that a temporary dislocation of individuals due to Covid-19-prompted travel restrictions should have no tax implications.
RMC 83-2020 provides that an individual will not be regarded as being present in the Philippines for tax residence purposes for the period after the scheduled day of departure. Thus, the BIR considers the period of the travel restriction as a “force majeure” and disregards this in determining an individual’s tax residence. This is, however, subject to the condition that this individual leaves the country as soon as circumstances would permit, like when the restrictions and/or quarantine measures have been lifted.
On the creation of the permanent establishment
Home Office PE. Because of the Covid-19 crisis, many are compelled to work from home.
Both RMC 83-2020 and the OECD Secretariat Analysis provide that working from home would not create a PE for a foreign enterprise in the Philippines because the conduct of a business in such a location lacks a sufficient degree of permanency or continuity, and that the home office is not at the disposal of the foreign enterprise. They recognize that this enterprise has no access or control over the home office of its employees in the Philippines.
However, the home office will be considered a PE if it is used continuously to carry on the business activities of the foreign enterprise even after the Covid-19 crisis, and if this enterprise has required the individual to use that location to carry on those activities.
Construction Site PE. Both RMC 83-2020 and the OEC Secretariat Analysis state that the duration of the temporary interruption of construction activities caused by the pandemic should be included in determining the life of a site and whether a construction site constitutes a PE.
Dependent Agent PE. A PE is also deemed to arise if a treaty resident appoints in the other state a dependent agent, or when a person habitually concludes contracts or plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise.
The OEC Secretariat Analysis provides that the activity of an employee or agent in another state would not be considered habitual if he or she is only working at home in that state for a short period due to force majeure or protective measures from the government.
Under RMC 83-2020, the BIR disregards the continued presence of an employee, partner or agent of a nonresident foreign corporation in the Philippines because of travel restrictions in determining the status of the firm on whose behalf the employee, partner or agent has been acting. In other words, the period of extended stay of the employee, partner or agent is not considered in counting the taxable presence of that corporation in the country. This is subject to the condition that the employee, partner or agent should leave the country as soon as circumstances permit.
On the resident status of a company or place of effective management
The OECD Secretariat Analysis provides that a temporary change in the location of the chief executive officers and other senior executives is an extraordinary and temporary situation due to the Covid-19 crisis and will not trigger a change in residence of the company.
The place of effective management is generally where key management and commercial decisions necessary for the conduct of the entity’s business as a whole are or in substance made.
Indeed, Covid-19 restrictions have given rise to a number of issues, including the determination of tax rules. It is a relief that the BIR and the OECD have considered that these restrictions should not give rise to tax implications