Special InTAX: August 2020 Issue 1 | Volume 5
InTAX is an official publication of R.G. Manabat & Co.'s Tax Group
InTAX is an official publication of R.G. Manabat & Co.'s Tax Group
Department of Finance
The Department of Finance (DOF) issued Revenue Regulations (RR) No. 20-2020, 17 August 2020, amending certain provisions of RR No. 6-2013, in relation to RR No. 6-2008, relative to the imposition of tax for the sale, barter, exchange or other disposition of shares of stock not traded through the Local Stock Exchange.
The amendment provides that for purposes of determining “fair market value” in the case of shares of stock not listed and traded in the local stock exchanges, the following rules shall apply:
1. For common shares of stock, the book value based on the latest available financial statement duly certified by an independent public accountant prior to the date of sale, but not earlier than the immediately preceding taxable year, shall be considered as the prima facie fair market value.
2. For preferred shares of stock, the liquidation value, which is equal to the redemption price of the preferred shares as of balance sheet date nearest to the transaction date, including any premium and cumulative preferred dividends in arrears, shall be considered as fair market value.
3. In case there are both common and preferred shares, the book value per common share is computed by deducting the liquidation value of the preferred shares from the total equity of the corporation and dividing the results by the number of outstanding common shares as of balance sheet date nearest to the transaction date.
4. For this purpose, the book value of the common shares of stock or the liquidation value of the preferred shares of stock, need not be adjusted to include any appraisal surplus from any property of the corporation not reflected or included in the latest audited financial statements, in order to determine the fair market value of the shares of stock. The latest audited financial statements shall be sufficient in determining the fair market value of the shares of stock subject of the sale, barter, exchange, or other disposition.
RR No. 20-2020 shall take effect fifteen (15) days following its publication in the Official Gazette or in a newspaper of general circulation.
(RGM & Co. Note: The RR was published in Malaya Business Insight on 19 August 2020.)
Bureau of Internal Revenue
The Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 83-2020, 17 August 2020, prescribing guidelines on the application of the relevant treaty provisions and, ultimately, on the allocation of taxing rights between treaty partners in relation to international tax issues related to cross-border workers or individuals who are stranded or quarantined in a country that is not their country of residence, and to unintended creation of permanent establishment (PE) of foreign enterprises as a consequence of the extended stay of their employees in the Philippines.
Income from Employment
Under the effective tax treaties of the Philippines with other countries, the residence State has an exclusive right to tax the employment income derived by its resident taxpayers except when the employment is exercised in another Contracting State, in which case, the latter State may tax the employment income subject to the provision of relief by the former State.
However, even if employment is exercised in the Philippines, the employment income will not be subject to tax in the Philippines if the following conditions concur:
1. The employee has not been present in the Philippines for more than 183 days (more than 120 days for residents of Poland; at least 90 days for residents of the United States of America) in aggregate in the year of income, fiscal year, calendar year, or any twelve-month period, depending on the applicable Double Taxation Agreement (DTA);
2. His/her remuneration is paid to him/her by, or on behalf of, an employer that is not a resident of the Philippines; and
3. His/her remuneration is not deductible against the profits of a permanent establishment which the foreign employer has in the Philippines.
Conversely, the Philippines may tax the employment income of an individual who is a resident of another contracting state only if any of the following three tests is met:
1. The employee is present for more than 183 days (more than 120 days for residents of Poland; at least 90 days for residents of the United States of America) in the Philippines; or
2. The employer is a resident of the Philippines; or
3. A non-resident employer has a permanent establishment in the Philippines which bears the remuneration.
Special Tax Residency Rules
Where an individual is prevented from leaving the Philippines on his or her scheduled day of departure as a result of the travel restrictions imposed by the government as a safety measure to contain COVID-19, the individual will not be regarded as being present in the Philippines for tax residence purposes for the period after the scheduled day of departure. The BIR will consider this as "force majeure" for the purpose of establishing such individual's tax residence, provided that he or she leaves the Philippines as soon as the circumstances would permit, such as when the travel restrictions and/or quarantine measures have been lifted. Whether a taxpayer is a resident for tax purposes in the Philippines is a question of act that requires consideration of all surrounding circumstances. Each case will be assessed and evaluated independently based on factual and unaltered evidence.
Inadvertent Creation of PE
Home Office PE
Working from home would not create a PE of the foreign enterprise in the Philippines because the conduct of business activities thereat lacks a certain degree of permanency and the home office is not at the disposal of the foreign enterprise. The intermittent conduct of business of the foreign enterprise at the home office of its employees in the Philippines due to COVID-19 will not, in any way, make such home office a location at the disposal of the enterprise.
If, however, the home office is used on a continuous basis for carrying on the business activities of the foreign enterprise even after the COVID-19 crisis, and it is clear from the facts and circumstances that the enterprise has required the individual to use that location to carry on its business, the home office may be considered to be at the disposal of the enterprise.
Temporary interruptions of construction activities due to the COVID-19 pandemic should be included in computing the duration of a site and in determining whether such construction site constitutes a PE.
Dependent Agent PE
Where an employee, partner or agent of a non-resident foreign corporation continues to be present in the Philippines and that presence is shown to result from travel restrictions related to COVID-19, the BIR shall disregard such presence in the Philippines for income tax purposes for the company on whose behalf the employee, partner or agent has been acting. In other words, the extended period of stay of the employee, partner or agent shall not be considered in counting the taxable presence of the non-resident foreign corporation in the Philippines.
In sum, the effects of COVID-19 will not result in the creation of a PE if the following requirements are met:
1. The non-resident foreign company did not have a permanent establishment in the Philippines before the effects of COVID-19;
2. There are no other changes in the company's circumstances save for the extended stay of its employee, partner or agent in the Philippines because of travel restrictions; and
3. The employee, partner or agent should leave the country as soon as the circumstances would permit.
A different approach will be applied. However, if the employee, partner or agent was habitually concluding contracts on behalf of enterprise in the Philippines before the COVID-19 crisis.
In order to prove that the extended presence in the Philippines was due to COVID-related travel restrictions, the concerned individual or company shall submit to the satisfaction of the BIR, relevant documents, including, but not limited to:
1. Authenticated sworn certification stating the relevant facts and circumstances of the bona fide presence of the employee in the Philippines;
2. Duly executed contract/s (must be consularized or apostillized if executed/signed in a foreign country);
3. Certified true copy of the confirmed booking or flight itinerary for the original flight;
4. Certified true copy of the confirmed booking or flight itinerary for the re-booked flight;
5. Certified copy of the travel advisory on the cancellation of flight issued by the airline company;
6. Certified true copy of boarding pass;
7. Certified true copy of the employee's passport, including blank pages thereof; and
8. Other documents that the BIR shall deem necessary depending on the circumstances.
RMC No. 83-2020 shall take effect immediately.
Attached are the full texts of the issuances.
© 2022 R.G. Manabat & Co., a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
For more detail about the structure of the KPMG global organization please visit https://home.kpmg/governance.