Tax Articles

Unregistered Non-Resident Taxpayers: Payment of Taxes

By Atty. Fulvio D. Dawilan

Fulvio D. Dawilan Managing Partner   +632 8403 2001 loc.310 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

There is a draft revenue regulations requiring online platform providers to impose creditable withholding taxes on their remittances to their partner seller/merchants for their sale of goods and services through the online platform. I’m not going to comment on this as I’m not really a fan of the creditable withholding taxes. It suffices to say that the application of the creditable withholding tax system should be limited to only a few types of income payments, as it used to be, and perhaps to a limited class of payees.

The object of creditable withholding taxes are income of residents who are supposed to be registered as taxpayers and who could be forced into the taxpayer database through some other means. What about if the seller is a non-resident? Let’s not forget that there are also non-residents who are selling through local online platform providers.

This reminded me of the issue I used to discuss in this column – how should the tax be made if the seller who contracted the services of the local service provider is non-resident?

Outsourcing of business activities in the Philippines by foreign entities is a common practice – almost all activities that can be outsourced by foreign businesses are done in this country. And this outsourcing arrangement comes in different business models. The most common is through the establishment of a subsidiary or licensing of a branch in the country to do the desired activities here or by contracting with a third party local entity. From a tax perspective, at least an entity – the outsourced Philippine affiliate or third party entity - is taxed in the Philippines for the revenues derived from the outsourced activities. Perhaps, what needs only to be observed is reasonable pricing for the revenues that are attributed to the entity taxed in the Philippines.

But it is also becoming a common practice for foreign businesses to deal directly with individuals – by employing them, engaging them as agents or hiring them as consultants/contractors. Either way, this may constitute doing business in the Philippines for the foreign employer/principal. That makes it a resident foreign corporation for tax purposes, and taxable for the income derived from sources within the Philippines. A resident foreign corporation is supposed to file its income tax returns and pays its own income taxes.

The question is – how should foreign corporations, especially those with no commercial registration in the Philippines, pay their taxes?

Unfortunately, there is no mechanism for foreign corporations to register as taxpayers in the Philippines for tax purposes only. For a foreign entity to register as a taxpayer with the tax authority, one must have first a commercial registration with the Philippine Securities and Exchange Commission. And that makes that foreign entity a Philippine branch. What if not?
A few years ago, I have written a number of times the lack of procedures for registration and compliance with tax obligations for permanent establishments (PE). To echo, a PE 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.
Apparently, other countries actually allow foreign entities, such as PEs, to register for tax purposes, even without commercial registration. This allows them to comply with their tax obligations in the country in which they are doing business. In this jurisdiction, if a business establishment cannot show its registration with the SEC or with the Department of Trade and Industry, it cannot register with the tax bureau. That makes them unable to register even if they are willing to do so.
Perhaps, the reluctance to allow foreign entities to register for tax purposes only is because their income are subjected to the final withholding taxes. Effectively, even if the foreign entity has PE and/or supposed to be treated as a resident foreign corporation whose income should be taxed based on net income, it is still treated as non-resident and the final withholding taxes on gross income payment apply.

But that is true only if the payor (client/customer) of the income is a Philippine entity. It does not apply in all cases. To mention only one, business activities outsourced by foreign businesses in the Philippines are not limited to those rendered or sold to Philippine customers. In many cases, the customer of the foreign seller is another foreign individual or entity. As such, the revenues flow from a foreign client/customer to a foreign supplier. The effect: this allows the foreign supplier get his revenues free of Philippine tax even if the activity that resulted into that income was performed in the Philippines. Not only that – the outsourced person in the Philippines gets his pay directly from the foreign entity. As to how he pays his tax on that, we can only guess.

With these considerations, it is time to craft rules allowing the registration of foreign entities, especially those doing business in the Philippines and/or those with PEs, for tax purposes only. This will oblige them to comply with their tax obligations, including the taxes on the entity due from the entity itself, as well as the withholding taxes on their outsource employees/agents. Even the proposed Ease of Paying Taxes Act suggests that the availability of registration facilities to taxpayers who are not residing in the country be ensured. That, I suppose, covers Filipinos and non-Filipinos.