March 2020 Articles - Suits the C-Suite | SGV & Co. | EY

31 March 2020

Noel Andro D. Bico

Tax breaks in these trying times

The government has announced several measures to contain the spread of COVID-19. President Rodrigo R. Duterte has placed Luzon under enhanced community quarantine and imposed stringent social distancing measures, with the entire country under a state of emergency. With the goal of protecting the health and safety of all taxpayers from the further spread of COVID-19, the Bureau of Internal Revenue (BIR) issued specific guidelines/circulars to be observed during the quarantine period. In Revenue Memorandum Circular (RMC) No. 25-2020 dated March 16, the BIR originally maintained its position that no extension of deadline shall be provided for the filing of 2019 annual income tax return (ITR) despite the quarantine being strictly implemented. However, considering the limitations in preparing the annual ITR and possible errors in determining the income tax due, taxpayers can amend the annual ITR filed, provided the concerned taxable period has not yet been subject to an audit. The additional income tax liability resulting from any amendment is to be paid without penalties if paid on or before June 15. The same circular also encouraged taxpayers, even those not required, to use the electronic filing facilities of the BIR (e.g., the electronic filing and payment system [eFPS] and eBIR Form Facility) to limit taxpayers’ movements and possible exposure to the virus. However, various stakeholders and associations raised concerns that the measures being implemented by the national government will have a significant impact on meeting the existing tax, accounting and auditing requirements. There may be delays in auditing the balances of companies and businesses due to, among others, fieldwork or meetings suspended and the work from home scheme enforced. ITR DEADLINE EXTENSION Fortunately, the BIR issued RMC No. 28-2020 dated March 18, amending RMC No. 25-2020. This amendment extends the filing deadline of the 2019 annual ITR and payment of the tax originally due on April 15 to May 15, without the imposition of penalties. Under this circular, taxpayers may file and pay the corresponding taxes due at any Authorized Agent Banks (AABs) nearest to the location of the taxpayer or to any Revenue Collection Officer (RCO) under the Revenue District Office (RDO). In other words, taxpayers may file and pay at their most convenient location. According to the press release of the Department of Finance (DoF), these emergency measures are offered to provide relief to taxpayers who will not be able to prepare, let alone file, the necessary ITR documents on or before the original annual deadline of April 15 because of minimal-staffing arrangements and enhanced community quarantine rules. In addition, the DoF estimated a shortfall in tax collections of around P145 billion, for which the national government may have to make up for with additional borrowing. Hence, the BIR urges taxpayers who are ready and able to file their ITRs to do so on or before the original deadline. DEADLINE EXTENSION FOR TAX RETURNS AND ATTACHMENTS The BIR likewise provided deadline extensions for other tax filings. On March 19, BIR Commissioner Caesar Dulay issued RMC No. 29-2020, amending RMC No. 26-2020 by extending the deadlines (by approximately one month) for the filing of various returns and payment of taxes due. Consequently, the BIR collection of taxes related to such tax filings may be delayed by approximately one month. The provisions of RMC No. 28-2020 (extension of deadline for filing of annual ITR and payment of the related income tax due) and RMC No. 29-2020 (extension of deadlines for filing of various returns and payment of related taxes due thereon) were further amended and clarified by RMC No. 30-2020 dated March 23. Under this circular, the required attachments for the filing of annual ITR are to be submitted on or before May 15. Moreover, deadlines were extended for other reportorial requirement submissions and one-time transaction (ONETT) payments. In general, a 30-day extension will be granted in case the deadline falls within the quarantine period. RMC No. 30-2020 also provided clarity by addressing inadvertent errors on the due dates in the filing of certain tax returns and payment of the related tax due thereon under RMC No. 29-2020. We should note that the BIR qualifies the application of the circular to Luzon, including the National Capital Region (NCR), which are under enhanced community quarantine and/or similar measures, and to other jurisdictions where Local Government Units have also adopted such measures. VAT REFUND APPLICATION EXTENSION Aside from the deadline extensions of these various tax returns and attachments, the BIR also extended the deadline for the filing of Value Added Tax (VAT) refund applications and the 90-day processing period through the issuance of RMC No. 27-2020 dated March 18. This allows the filing of VAT refund applications covering the quarter ended March 31, 2018 to still be accepted until April 30, 2020. The original deadline was March 31, this year. The 90-day processing period is also suspended for VAT refund claims that are currently being evaluated and those that may be received from March 16 to April 14. The counting of the number of processing days will resume after the enhanced community quarantine is lifted. CONDUCTING FIELD OPERATIONS Similarly affected is the conduct of audit/investigation/other field operations by revenue officials and employees. In relation to this, Deputy Commissioner (Operations Group) Arnel SD. Guballa, issued Operations Memorandum No. 20-2020 dated March 17. Under this memorandum, Revenue Officers will continue to work on their assigned cases, whether prescribing or not, based on the documents previously submitted by the taxpayers to the BIR and other information available to the Bureau. Officers are encouraged to work from home but without sacrificing the security of the data and information being handled. Non-prescribing audit cases which are still lacking documentary evidence were given a 30-day extension for the submission of the report of investigation. In addition, field audit/investigation, any form of business visitation or any field operations have been suspended. Likewise, personal service of electronic Letters of Authority (eLAs), Notice of Informal Conference, Discrepancy Notices or Missions Orders have been temporarily shut down during the quarantine period. Should a taxpayer appear in the BIR office to submit documents, such documents are to be received without delay and without further verbal discussion with the taxpayer in order to limit contact and maintain social distancing. In summary, the extended deadlines are as follows: • ITR filing — May 15 • Tax returns & attachments — May 15 • Additional tax liabilities — 30-day extension • VAT refund applications — April 30 • Non-prescribing audit cases lacking documentary evidence — 30-day extension FACING THE CHALLENGES While the government endeavors to address every Filipino’s need for basic services, health and safety, it is imperative that we as taxpayers likewise fulfill our duties and obligations as citizens. In our current situation, the maxim that taxes are the lifeblood of the country has never been more apt. However, life — and taxes, as the main source of government resources — must go on. Without taxes, government agencies cannot continue to operate. Hence, the need to collect taxes must necessarily be balanced against other interests. The deadlines and timelines mentioned in this article are pursuant to the author’s understanding of the administrative issuances of the BIR as of the date of writing. These may be subject to change in light of the recently passed RA No. 11469 or the “Bayanihan to Heal as One Act,” which authorizes the President to move statutory deadlines and timelines for the submission of documents and payment of taxes, fees, and other charges required by law, among others. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views reflected in this article are the views of the author and do not necessarily reflect the views of SGV, the global EY organization or its member firms. EYG no. 001498-20Gbl Noel Andro D. Bico is a Senior Associate from the Global Compliance & Reporting Sub-Service Line of SGV & Co.

25 March 2020

Conrad Allan M. Alviz

Are you ready for the data-driven digital era?

Digital technologies offer new opportunities to create value by leveraging data captured while companies carry out business as usual. However, while most companies embark on data-driven digital transformation, many still struggle to 1) determine the right data strategy that allows them to become a truly data-driven organization and 2) properly manage and govern their data. In fact, data management and governance ranked as the second top IT challenge identified by business tech leaders after IT security and privacy. As data increases in scale and complexity, some organizations remain fragmented and still work in silos to collect, transfer, process, analyze and store their growing data. Many companies cannot adapt to these changes and find themselves stuck in the archaic way of managing data. As companies work to innovate and go digital, management must strike a balance between the need to implement information security mechanisms and effective data management, including but not limited to data quality, data governance and data protection. Based on research, consumers of data spend 80% of their time looking for and cleansing data, and only spend 20% of their time analyzing and transforming data into valuable information to drive sound decision-making. This highlights the need for companies to reassess their data management strategy as well as their governance structure to better manage their data. Initiating data management and governance can seem daunting, considering how these cannot be confined to one corner of an organization. They can only be effectively managed through collaborative efforts between business departments and IT. Companies also need to govern their data environment regardless of the type of data and where it resides. A sound data management and governance program helps an organization achieve its desired targets over time to support its business objectives, while upholding data integrity and consistency accelerates the deployment of business activities and can reduce the cost of owning data. With this, companies should start by looking at their data sources and make sure that there are sound strategies and robust policies in place to protect the integrity of their data. There are many reasons why data management and governance programs fail, or at least, underperform. A company’s data governance strategy and policies may not be established nor well-defined, or data management itself is either viewed as an academic exercise or treated like a finite project. Executives may also isolate data as an “IT issue,” leading to business units and IT not working together to manage data in a structured and repeatable manner. It’s possible that the company’s unique culture is not taken into account, or that company personnel are already overloaded and can no longer handle governance activities. To revisit their data management strategy and governance mechanisms, companies can take the following items into consideration. ALIGNING DATA GOVERNANCE STRATEGY Companies must first define what data management and governance mean to their business. There should be a clear understanding of their business goals, since these will drive the company’s data strategy and scope. The scope is then defined based on priorities and the level of governance that fits the company culture. Establishing data governance will impact the whole organization. Placing strong focus on the company’s change management and communications approach is vital for successfully implementing and sustaining a data governance strategy. Everyone in the organization needs to understand the purpose of treating data as a strategic asset as well as their role in this shift. Lack of ownership can be a very challenging issue, especially during the early stages of implementation. Companies should also formalize their data governance committee and clearly define roles and responsibilities while ensuring that the responsibility does not rest solely on IT. Since data governance requires the collaboration of the entire organization, management support is the most significant component when starting a governance program. ESTABLISHING FORMAL DATA GOVERNANCE POLICIES Policies intend to establish ground rules that must be followed within the organization. They should enable the right people and the right steps to be taken at the right time. Data must be managed as an important asset of every organization. Formal accountability should be put in place while compliance is ensured with the relevant regulations, especially on data privacy and security. Data quality must also be consistently managed across the entire data life cycle. Management should establish a periodic review and approval cycle to ensure that data governance policies stay relevant and responsive to the fast-changing business landscape. Proper key performance indicators (KPIs) must be agreed upon and put in place when the data strategy is implemented. PROFILING YOUR DATA AND COMPLETING A DATA CATALOGUE A company should be aware of what data it has on hand, making it imperative to establish a data catalogue which becomes the heart of the data governance framework. As a living document, the data catalogue is subject to changes to accommodate the organizational (business and technology) landscape. Companies must know where they use their data as well as why it captures, stores and uses the data. A data catalogue should help entities define their data, identify data owners and a data custodian to establish accountability, and define data quality measures to ensure data integrity, confidentiality and availability. This allows management to rely on a single source of truth to support their decision-making. SELECTING THE APPROPRIATE TECHNOLOGY There are several technologies available that can provide visualization of the quality of data that a company decides to master. This can be achieved by utilizing efficient design technology that provides accessibility and the seamless integration of data across all systems. It should also be noted that in selecting a design solution, cybersecurity is a key area of consideration. Establish checks and balances to monitor data quality on a regular basis, the frequency of which depends on the required availability of top critical data elements. One way to achieve this is to implement audits and to monitor KPIs, as well as to continuously evaluate and improve the company’s data governance program. UTILIZING A VALUABLE RESOURCE Companies can no longer ignore data as a resource nor overlook its management to properly maximize its value. As companies continue to become more data-driven, their success will ultimately depend on their ability to manage and utilize a coherent view of their data. Better data — and a clearer view of what that data means — can give valuable insights that ultimately allow companies to make well-informed decisions in the face of change and growth. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Conrad Allan M. Alviz is a Senior Director from the Advisory Service Line of SGV & Co.

16 March 2020

Erickson Errol R. Sabile

Will it be endgame now for 5% GIT?

Once again we wait to see if the Corporate Income Tax and Incentives Rationalization Act or the CITIRA bill (either House Bill No. 4157 or Senate Bill No. 1357) will pass into law this month. The bill is being repackaged for the third time after its predecessor bills were no legislated (TRAIN 2 and TRABAHO). If passed, CITIRA is expected to have a strong impact on Philippine Economic Zone Authority (PEZA)-registered firms. For PEZA-registered firms availing of the 5% Gross Income Tax (GIT) incentive, the withdrawal of the privilege would eventually mean a reassessment of their direct costs and expenses that would qualify as deductions in light of Revenue Regulations (RR) No. 11-05 — Definition of Gross Income Earned. This makes it an ideal time for companies to prepare for the eventual implementation of CITIRA by conducting simulations and evaluations using their most recent balances. DEDUCTIBLE EXPENSES FOR 5% GIT UNDER THE EXISTING PEZA LAW Favorably for PEZA-registered firms under 5% GIT, the Court of Tax Appeals (CTA) in recent years has been consistent with its interpretation that the list of direct costs in RR No. 11-05 is not exclusive but merely enumerates the expenses that are in the nature of direct costs. Thus, PEZA-registered entities may be allowed to deduct expenses which are in the nature of direct costs even if they are not specifically included in the list provided in RR No. 11-05. However, these items must be directly attributable to the entity’s PEZA-registered services/activities. The same position — that the list of expenses provided by RR No. 11-05 is not exclusive but merely instructive — was carried on in the recent CTA En Banc (EB) Case No. 1809-10 dated Nov. 14, 2019 (Moog Controls Corporation-Philippine Branch vs CIR). Moreover, Moog was able to prove that expenses (i.e., repairs and maintenance, data processing expense, building insurance expense and outside services) claimed under 5% GIT were directly related to its registered activities, and hence allowed as deductions under 5% GIT. However, it is worth pointing out that while a number of recent court decisions held by the CTA adopted the non-exclusivity of the list of expenses under the mentioned RR, the CTA has also disallowed the inclusion of certain expenses such as accident/life insurance, equipment and uniforms for on-the-job trainees, employee activities (e.g. holy mass for Sto. Nino Feast, Ping-Pong tournament expenses, treadmills for physical fitness clubs), non-technical training and development, the Department of Energy (DoE) electrification fund, general office expenses, business expenses, taxes and licenses for being unrelated to the rendition of PEZA-registered services. (CTA EB Case No. 1207 dated Feb. 3, 2016, East Asia Utilities Corp. vs. CIR) Needless to say, it is crucial that adequate documents (e.g., journal vouchers, accounts payable voucher, invoices/receipts) are maintained to support that the expenses can be attributed to the rendition of the PEZA-registered activity. (CTA Case No. 8508 dated Sept. 1, 2014, Medtex Corporation vs. CIR) 5% GIT UNDER CITIRA HOUSE AND SENATE BILLS While both CITIRA versions of the House and Senate seek to lower the regular corporate income tax rate and rationalize the tax incentives currently enjoyed by entities with special registration (e.g., PEZA–registered firms), each bill has its own proposed provision on the continuation of incentives granted before it takes effect as a law. HOUSE BILL NO. 4157 In the House version, registered activities granted an Income Tax Holiday (ITH) shall be allowed to continue and the incentive may be availed of for the remaining period of the ITH or for only five more years (whichever comes first). This is allowed provided that the 5% GIT shall commence only after the ITH period has lapsed; and further, that the 5% tax on gross income earned shall be allowed to continue for periods based on a schedule that varies depending on how many years the current tax incentive is being enjoyed (up to a maximum of five more years). After the lapse of the 5% GIT period, the regular corporate income tax rate shall take effect. At the same time, this version grants ITH, a reduced corporate income tax of 18% or enhanced deductions for commercial operations dependent on location. For example, companies in the NCR can enjoy up to three years ITH and up to two years reduced corporate income tax rate. Areas adjacent to Metro Manila get slightly longer periods, while all other areas can get up to six years ITH and four years reduced corporate income tax. The bill also states that the regular corporate income tax rate will be reduced by 1% every two years from 2022 until 2030. SENATE BILL NO. 1357 In the Senate version, registered activities only granted an ITH can continue to enjoy the incentive for the remaining period of the ITH. On the other hand, the 5% tax on the gross income of registered activities granted prior ITH (where the ITH will expire within five years once CITIRA takes effect) shall commence only after the lapse of ITH and shall continue for the remaining period (but not to exceed five years). Further, the 5% tax on gross income earned shall, similar to the House version, be allowed to continue for periods based on a schedule that varies depending on how many years the current tax incentive is being enjoyed, up to a maximum of five more years. Interestingly, the Senate version added a provision extending the sunset period for availing of 5% tax on gross income up to seven years for firms that export 100% of output, employ 10,000 Filipino workers in the incentivized activity, or are engaged in “footloose” manufacturing, which are operations outside of Manila that export manufactured goods and have a designated labor to asset ratios for a period of time before CITIRA. Similar to the House version, the Senate version grants an ITH followed by a special corporate income tax rate (SCIT) or enhanced deduction whose durations are based on the registered enterprise’s location and industry tier, with the caveat that the total period with incentives not last more than 12 years. The Senate version, however, sets the SCIT at 8% of the gross income earned in lieu of all national and local taxes, rising 1% per year until it reaches 10% in 2022 and onwards. Nevertheless, the determination of what constitutes direct costs will remain relevant during the sunset years of existing registered activities under the 5% GIT prior to CITIRA, and likewise under the new SCIT rates proposed by the Senate in this version. We should also note that PEZA-registered activities that qualify for registration under the strategic investments priority plan (SIPP) may opt to be governed by the provisions under both House and Senate versions of CITIRA. In such a case, such enterprises will have to surrender their Certificate of Registration, signifying their intent to waive the incentives they previously enjoyed. WHAT CAN BE DONE IN THE MEANTIME? At this point, knowing that the 5% GIT regime may slowly fade out of the picture once CITIRA takes effect, it would be prudent for PEZA-registered firms to evaluate the law’s impact on their current and future operations by way of a simulation using the most recent account balances. PEZA-registered firms should consider the following scenarios: • The companies continue to avail of their current incentives as PEZA-registered entities. • The companies opt to waive their privilege to avail of the incentives as PEZA-registered entities: 1. Where the registered activities of the companies qualify for registration under the SIPP. 2. Where the registered activities of the companies does not qualify for registration under the SIPP. By carefully conducting this gap analysis, PEZA-registered firms will be better able to evaluate if it is better for them to maintain their current incentives or to deregister from PEZA and instead fall under the new provisions of CITIRA. As with many projection matters, advance knowledge and the results of the simulation are often invaluable in helping companies decide on their way forward. By using real data from the company’s most recent balances, the simulations then become even more accurate and relevant to the company’s actual operations. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Erickson Errol R. Sabile is a Tax Senior Director from the Global Compliance Reporting Service Line of SGV & Co.

10 March 2020

Ma. Theresa M. Abarientos-Amor

How to make digital taxation click

Digital technology has undoubtedly revolutionized the world economy. With the growing popularity of online shopping in particular, businesses can reach consumers without needing a physical location. The increasing digitization of the world economy has not only made the sale of goods and services instantaneous and efficient — it has also provided a convenient way for consumers to purchase goods without having to waste time being stuck in heavy traffic. According to research pioneered by Google, the internet economy in Southeast Asia hit the $100 billion mark in 2019. By 2025, the internet economy is projected to grow to $300 billion. These numbers indicate a significant opportunity for tax authorities to not only regulate appropriately, but to also tap this source for additional government revenue. CROSS-BORDER ONLINE TRANSACTIONS In 2013, the BIR issued Revenue Memorandum Circular (RMC) No. 55-2013 to set the tone for companies operating in the digital market. By reiterating the obligations of parties in online transactions, the Circular sought to enforce our tax laws in the digital economy. However, the Circular has yet to address cross-border online transactions, or how taxes will be imposed on non-residents for online sales to local consumers. One apparent reason for this may be the inadequacy of our present tax laws as basis for taxing this type of transactions. Like most jurisdictions, the Philippines relies on physical presence or locus of activity within the country as a condition for the imposition of taxes. Tax treaties are likewise framed this way. However, cross-border online sales do away with physical presence since most online servers are located outside the country. Sales activities conducted through these portals are deemed to occur outside Philippine territory, as it can be argued that since an online transaction’s server is located outside the Philippines, the business itself isn’t considered to be held within the country. Such transactions can therefore be said to be outside the country’s taxing jurisdiction. Regardless, it is difficult to determine where the locus of the sales activity truly lies, only making it more difficult to enforce tax rules. THE NEED TO INNOVATE PRESENT TAX LAWS Tax authorities will need to come up with innovations to our present tax laws to address tax profits earned by non-residents from consumers here, as well as the enforcement or collection of taxes, the visibility over tax reporting data, and the addressing of the controversy surrounding the issue of capturing lost profits for our country. However, doing so without disrupting how bricks-and-mortar businesses are taxed can be daunting. In this light, perhaps our tax authorities can revisit the recent proposals of the Organization for Economic Cooperation and Development (OECD). Last year, the OECD released the Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitization of the Economy. While the Philippines is not a member of the OECD, the issues tackled by the organization are felt worldwide, and our tax treaties are patterned after the publication. The tax authority has also cited OECD commentaries in several rulings, giving the commentaries a more persuasive effect. The Philippines can benefit from the suggestions raised by the organizations in addressing base erosion issues for tax purposes. The proposals contained in the publication were grouped into two pillars: Pillar One, which focuses on the allocation of taxing rights and seeks to undertake a coherent and concurrent review of the profit allocation and nexus rules; and Pillar Two, which seeks to develop rules that provide jurisdictions with a right to tax back where other jurisdictions have not exercised their primary taxing right, or where the payment is otherwise subject to low levels of effective taxation. It calls for the development of a coordinated set of rules such as the income inclusion rule, switch-over rule, undertaxed payment rule, and the subject to tax rule. Their development addresses the ongoing risks from structures that allow multinational companies to shift profit to jurisdictions with very low or no taxation. There are three proposals under Pillar One that tackle how taxing income generated from cross-border activities in the digital age could be allocated among countries. These are composed of the “user participation” proposal, the “marketing intangibles” proposal and the “significant economic presence” proposal. All are supposed to allocate more taxing rights to the jurisdiction of the customer and/or user. Of special interest is the “user participation” proposal, which focuses on digitized business models such as search engines, social media platforms and online marketplaces. This proposal suggests that profits should be allocated to market jurisdictions based on the value-creating activities of the active user base. THE DIGITAL ECONOMY AS AN ADDED SOURCE OF REVENUE As a burgeoning digital economy, we may wish to explore how value-creating activities can be a source of taxing rights over income from digital cross-border sales. Granted, tax authorities will need to carefully weigh the nature of digital taxing rights vis-à-vis the importance of negotiations. One only needs to ask about the fate of the digital tax passed by France last year, which had to be postponed amid US retaliatory tariffs. However, once the statutory foundation for a set of tax rules that apply to the digital economy is drafted, bilateral as well as region-wide discussions in matters of implementation will surely follow. The key here is to find the right balance between creating a consistent and globally accepted set of digital tax rules that can benefit tax authorities in all jurisdictions while also being fair and supportive of digital enterprises that face new and rapidly evolving challenges to remain competitive in an increasingly crowded online market. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Ma. Theresa M. Abarientos-Amor is a Senior Manager from the Tax Advisory Services Group of SGV & Co.

02 March 2020

Marlynda I. Masangcay

Foreign nationals and the taxman

Foreign nationals working in the Philippines are governed by at least three sets of rules — those of taxation, immigration and labor. Only by fully complying with each set of rules can foreign nationals ensure a fruitful and worry-free stay in the Philippines. This article focuses on taxation. For regular Filipino employees, taxes due on salaries are withheld by their employers and remitted to the tax authorities during the year. Foreign nationals, however, may be covered by Philippine tax rules but are unaware that they have tax reporting obligations. Certain tax obligations pertain to foreign nationals on home payment arrangements, whether partially or in full, and to those who come to the Philippines as short-term business travelers. There are foreign nationals who work in the Philippines under a split-payroll arrangement, i.e., their salaries are paid both from their home countries and from their Philippine employers. Some foreigners come to the Philippines for a specific business purpose within a short time period with wages usually paid from their home payrolls. Under both circumstances, there are fewer issues to consider if the home country payments are recharged to a Philippine entity as these will eventually be subject to withholding tax. However, in instances when the payroll costs remain with the home country, it is more difficult for the Philippine government to tax the foreign national. This is because no local entity or agency is privy to the amount that they receive from abroad. This is further complicated by existing tax rules governing foreign nationals that relate more to their presence and privilege to work in the country, but not to their tax obligations. The question arises: Are these foreign nationals really subject to Philippine income tax on offshore wage payments? The answer may seem to be a straightforward “no” since the income or part of it is not paid by a Philippine company. However, the reality is not that simple. We will need to take into account the basic principles on situs (or place) of taxation. FOREIGN-SOURCED INCOME As a general rule, the basis for taxation of foreign nationals is on Philippine-sourced income only. The issue may lie in what constitutes foreign-sourced income. Employment income is considered Philippine-sourced if it pertains to services performed in the country. This is regardless of where the income was paid, where the contract was perfected, or where the payor resided. Thus, in determining the extent to which foreign nationals are subject to tax, the basic consideration is where the work for which the income is earned was performed. The paying entity need not be a Philippine company; there does not even have to be a performance agreement between the foreign national and the local office. As long as the work is rendered in the country, the income derived from such work is generally subject to Philippine income tax. We say “generally” as there may be income tax exemptions for foreign nationals who are tax residents of countries with which the Philippines has bilateral agreements on double taxation. TAX ISSUANCES FOCUSING ON FOREIGN NATIONALS Adding to the ambiguity is the absence of other government rules on how foreign nationals are to be taxed. However, in 2019, following the sudden and steady influx of foreign nationals working in the Philippines (not to mention the lost revenue from this working group) the government released four issuances directed towards subjecting foreign nationals to tax. At the forefront is the Joint Memorandum Circular (JMC) No. 001, series of 2019, Rules and Procedures Governing Foreign Nationals Intending to Work in the Philippines. Drafted by nine government agencies, the JMC aims to harmonize the regulations and policy guidelines on the issuance of work permits and work visas to foreign nationals as well as the authority to hire and employ foreign nationals. Such permits are usually issued by various government agencies, including the Department of Labor and Employment (DoLE), Professional Regulation Commission, Bureau of Immigration (BI), and others. The JMC requires foreign nationals and/or the employer/withholding agent to secure a Tax Identification Number (TIN) from the Bureau of Internal Revenue (BIR) as a precondition for permits and visas. A special task force (composed of the DoLE, the BI and the BIR) was also created to conduct joint inspection of establishments employing foreign nationals. Moreover, a database will be created to record all issued work permits and authority to employ and hire foreign nationals. Aside from the JMC, the BIR also issued Revenue Memorandum Order (RMO) 28-2019, which prescribed the registration requirements for foreign individuals not engaged and/or engaged in trade or business or gainful employment in the country. The BI then issued two Operations Orders, both dealing with the TIN as a requirement for work permits and non-immigrant visa applications. CONSIDERATIONS FOR TAX COMPLIANCE To allow strict monitoring of the presence of and tax compliance among foreign nationals, it would be helpful for the government to clarify the definition of “taxable work or services” for foreign nationals. To illustrate, there are short-term business travelers who stay in the Philippines for only a few days or months under a 9a visa and perform activities even without a Special Work Permit (SWP). Securing a 9a business visa does not require a TIN, and these individuals may assume that they do not have tax obligations (either to report any income and pay tax, or to file any applications for tax treaty relief), even if their activities in the country qualify as work or performance of a service. Furthermore, compliance with TIN registration of foreign nationals may be difficult, especially if additional documents are required. For example, foreign nationals married to Filipinos and who apply for a TIN used to be required to submit English-translated and authenticated/consularized marriage certificates with their application. REVISITING TAX OBLIGATIONS FOR FOREIGN NATIONALS Policies should be reviewed to consider the changes that come with the fast-evolving world of workforce mobility, such as with the Emigration Clearance Certificate (ECC). An ECC is required from foreign nationals departing from the Philippines (either temporarily or for good) to ensure they have no pending obligation with the government. Current BI rules on ECC issuance, however, do not mention any need for the foreign national to submit documentary clearance of unfulfilled responsibilities from other government agencies. There appears to be no solid coordination process among government institutions. There is also no database to provide the information necessary to support an ECC application. With the JMC mentioned previously, it may help all concerned agencies to look into the ECC process and develop a method to cover the tax compliance obligations of departing foreign nationals. It would also be worth looking into the best practices of tax jurisdictions like Singapore, the US and Canada on their exit permits and non-residency status upon departure of foreign nationals. While the government is undoubtedly concerned about regulating the activities and rightful tax obligations of foreign nationals, there is much that can be done in terms of efficient implementation. We can hope that, given the number of government agencies involved in legalizing the affairs of foreign nationals, forthcoming guidelines will facilitate compliance. Moreover, with a TIN now a pre-requisite for work permit application, it may be advisable for foreign nationals and their employers to revisit their actual tax obligations arising from locally-sourced income. This is an opportune time to do so, as the April 15 tax filing deadline quickly approaches. Surely, no one wants the additional burden of stiff penalties, a BIR examination, or reputational peril that may be brought about by failure to comply with tax obligations. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Marlynda I. Masangcay is a lawyer and Tax Senior Director from the People Advisory Service Line of SGV & Co.

March 2020

Tax breaks in these trying times

Are you ready for the data-driven digital era?

Will it be endgame now for 5% GIT?

How to make digital taxation click

Foreign nationals and the taxman

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