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Atty. Fulvio D. Dawilan discusses the absence of registration and mechanisms of tax payment for permanent establishments.

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How Permanent Establishments Should Pay their Taxes?

By Atty. Fulvio D. Dawilan

"A foreign entity with a PE is considered to be doing business in the country. It thus falls within the definition of a resident foreign corporation, and not a non-resident foreign corporation. As such, the more proper mode of paying its tax is through the filing of its own tax return, like any other resident foreign corporation. A PE should be able to register with the tax authority so that it can comply with its tax obligations."

For cross-border transactions, the extent of activities, the duration of projects and the length of stay of representatives of a foreign business in a host state are among the factors that have significant impact on the taxation of those transactions in the host state. These factors are especially relevant to business entities which are residents of countries of which the Philippines has existing tax treaties, as these events may have impact on the creation of a taxable presence in the Philippines. I’m referring to the possible creation of a permanent establishment (PE) in the country.

About two years ago, I wrote in this column some concerns related to PEs. With a growing number of queries on PE registrations and compliance with tax obligations, I’d like to revive that to echo the call for the crafting of rules that would govern the registration of PEs for the payment of their tax obligations.

725. BMArticle.Tax.Obligation.of.a.Permanent.Establishment2.FDD.12.01.2020 PE 2But what actually is PE? It is a concept in international taxation whereby a country in which a foreign entity does business has the right to impose its taxes when the situations defined in tax treaties are present. It is a presence in another country with business activities sufficient for that other country to impose tax. These business activities and presence necessary to create a PE are defined in tax treaties between the country where the entity has a residence and the country where it does business.

The Philippines has concluded more than 40 tax treaties with other countries, most of which have been adopted based on the UN Model Tax Convention. These treaties govern the right of the parties to impose taxes on the income derived by residents of the other country within its border. In most of these treaties, a PE is described as a fixed place of business in the Philippines in which the business of a foreign enterprise is wholly or partly carried on. A PE can be created due to the presence of a place of management; a branch; an office; a factory; building sites, construction or assembly projects that last for a defined period; 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. Presence of these gives our tax authority the right to tax foreign entities on their business income derived from the Philippines that are related to those presence or activities.

But how are the obligation to pay tax by these PEs implemented? In the case of a branch of a foreign corporation, which is also a PE, its registration and the procedures for the payment of its taxes are similar to domestic corporations. This is so because a branch is required to be registered with and obtain a license to transact business from the Philippine Securities and Exchange Commission. It 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.

What about the other types of PEs? There are a number of business activities which involve one-time projects and/or which are relatively of limited or short term duration, yet long enough to breach the threshold provided in the treaty for the creation of PE. The extent of the activities and the duration of business and other considerations usually do not warrant the registration with the SEC. With business presence in the Philippines and deriving income from the country, should they not be allowed to register only for taxation purposes and allow them to pay their taxes like any other registered taxpayer?

Apparently, there is no prescribed procedure for that. The absence of procedures for the registration of PEs for tax purposes results in the treatment of PEs as non-resident foreign corporations (NRFCs), whereby their taxes are paid through the final withholding taxes. In one case, the Tax Court declared that a foreign corporation with a PE is still treated as NRFC for income taxation purposes. 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, payment of its taxes through the final withholding tax system was proper.

A foreign corporation, however, that is doing business in the Philippines, is considered a resident. The Tax Code itself provides that definition. As a PE is doing business in the Philippines, it is embraced within the definition of a resident foreign corporation. It should be allowed to pay its taxes as a resident foreign corporation, which is allowed to compute taxes based on net income as in the case of any other corporate taxpayer.

And it is not only the Tax Code that allows the payment of taxes by RFCs based on net income. Tax treaty provisions provide that in the determination of the business profits of PEs , there shall be allowed as deductions ordinary and necessary expenses which are reasonably allocable to such profits, including executive and general administrative expenses, whether incurred in the state in which the PE is situated or elsewhere. This means that PEs should be allowed to claim deductions for expenses that are incurred in earning the income of the PE. To collect tax based on the gross amount through the imposition of final withholding tax negates this treaty commitment. Besides, the imposition of final withholding tax normally serves as deterrent for the successful conclusion of a contract with foreign providers.

To sum it up, a foreign entity with a PE is considered to be doing business in the country. It thus falls within the definition of a resident foreign corporation, and not a non-resident foreign corporation. As such, the more proper mode of paying its tax is through the filing of its own tax return, like any other resident foreign corporation. A PE should be able to register with the tax authority so that it can comply with its tax obligations. To be able to do so, there should be uniform guidelines for the registration of PEs and payment of their taxes. And that is not only for compliance with the Tax Code provisions and tax treaty commitments. Requiring the PEs to register as taxpayers may even be beneficial on the part of the tax authority. This would allow it to impose other taxes, such as the applicable business taxes and withholding taxes and allow it to exercise is review powers.

The author is the Managing Partner of Du-Baladad and Associates Law Offices (BDB Law), a member-firm of WTS Global.

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 This email address is being protected from spambots. You need JavaScript enabled to view it. or call 8403-2001 loc 310.