Under the National Internal Revenue Code of 1997, as amended (Tax Code), Non-Resident Foreign Corporations (NRFCs) are generally subject to 25 percent of gross income earned from all sources in the Philippines in each tax year. Tax payable on income received by NRFCs is subject to final withholding tax (FWT) based on gross income. The law imposes an obligation on the local income payer to collect, report and remit taxes paid by the NRFCs by being primarily liable for the unpaid or unpaid taxes of those NRFCs, taking into account the rule that NRFCs are not legally bound have to register as taxpayers in the Philippines.
However, a situation may arise where the income payer is also an NRFC who does not need to register as a taxpayer and withhold payments to NRFCs for income they receive from sources within the Philippines.
For example, a 100 percent foreign owned Filipino domestic company was dissolved. After the company’s business was settled, the assets of the dissolved entity were owned by its shareholder, an NRFC. These assets can be real estate (e.g. machinery, equipment) or personal effects that are located or found in the Philippines.
Tax law provides that profits from the sale of assets located or found in the Philippines are generally considered to be income from sources within the Philippines. Thus, if the NRFC sells these assets to a taxpayer who is a tax resident in the Philippines, the resident purchaser is required to withhold and pay the income tax due on the NRFC’s sale to the government. If the sale is subject to sales tax, the person liable to withholding tax is also obliged to withhold the sales tax due on the sale and to pay the tax using the BIR form 600-VT. The person entitled to withhold may even use the withheld sales tax as their own input tax when submitting the tax return.
However, if the NRFC, which owns assets or real estate located or located in the Philippines, decides to sell those assets or real estate to another NRFC, there is still no definitive settlement for that situation. This means that the Bureau of Internal Revenue (BIR) may not know that a taxable transaction has occurred unless the NRFC reports and pays the tax due. Even assuming that NRFCs voluntarily submit themselves and their income to the jurisdiction of the BIR, there is no rule outlining the method or procedure for payment and filing. Therefore, NRFCs may consider that the sale of assets and real estate found or located in the Philippines is not subject to Filipino taxes.
Likewise, there is no clear rule that states that NRFCs that have a permanent establishment in the Philippines must follow the guidelines for paying taxes that are attributable to their permanent establishment.
In the cases ruled by the Tax Court of Appeal, it was found that NRFCs believed to have a permanent establishment in the Philippines will not be converted to resident foreign corporations under the law. The existence of a permanent establishment only tells how the income attributable to the permanent establishment is to be taxed, but the NRFC remains an NRFC. Because it is taxable, there are no clear rules for paying and filing tax by NRFCs that have a permanent establishment in the Philippines.
To reiterate, taxes due on NRFC’s income are paid through the withholding tax system, which means there are no reporting requirements under any applicable tax law or regulation in the Philippines. With the exception of the Unique Tax Identification Number (TIN), the BIR cannot force NRFCs to register as a taxpayer in the Philippines. However, NRFCs do not always transact with Philippines tax residents who have withholding obligations on income payments to the NRFC.
It is time for the BIR to fill that loophole and put in place policies or procedures that will apply to transactions between two NRFCs involving real estate or assets that are taxable in the Philippines. The lack of final regulations and the natural inclination of certain taxpayers to avoid paying taxes can result in withholding government revenue from taxes that should be due and collected and paid by the NRFCs.
The author is Senior Manager Tax and Corporate Services at Navarro Amper & Co., a member of the Deloitte Asia Pacific Network. For comments or questions, email [email protected] Deloitte Asia Pacific Ltd. is a limited company and a member company of Deloitte Touche Tohmatsu Ltd throughout the region including Auckland, Bangkok, Beijing, Hanoi, Ho Chi Minh City, Hong Kong, Jakarta, Kuala Lumpur, Manila, Melbourne, Osaka, Seoul , Shanghai, Singapore, Sydney, Taipei, Tokyo and Yangon.