Under the foreign Investments Act, a foreign company is deemed to be engaged in a trade or business (also called continuous commercial dealings and other acts constitutive of doing business in the Philippines) when:
- Soliciting orders, or service contracts;
- Opening of offices or branches;
- Appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling 180 days or more;
- Participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and
- Any other act or acts which imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of functions normally incident to, and in progressive prosecution of, commercial gain or the purpose or object of the business organization.
According to the same Act, the following are not constitutive of a trade or business in the Philippines:
- Mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor;
- Having a nominee director or officer to represent its interest in such corporation;
- Appointing a representative or distributor domiciled in the Philippines which transacts business in the representative’s or distributor’s own name and account;
- The publication of a general advertisement through any print or broadcast media;
- Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines;
- Consignment by a foreign entity of equipment with a local company to be used in the processing of products for export;
- Collecting information in the Philippines; and
- Performing services auxiliary to an existing isolated contract of sale, which are not on a continuing basis, such as installing in the Philippines machinery it has manufactured or exported to the Philippines, servicing the same, training domestic workers to operate it, and similar incidental services.
While the Philippines adopts the United Nations (UN) Model Convention in most of its tax treaties, the tax authorities also refer to the Organisation for Economic Co-operation and Development (OECD) commentaries for the interpretation of treaty provisions.
Effective 17 August 2020, the Philippines Bureau of Internal Revenue (BIR) has issued a circular addressing the issues of inadvertent creation of a permanent establishment in light of the COVID-19 pandemic which provides as under:
Employees of a foreign enterprise in the Philippines may have to work at home in compliance with the government's imposition of strict home quarantine measures and not in compliance with the enterprise's requirement due to the COVID-19 pandemic crisis. This would not create a permanent establishment of the foreign enterprise as the conduct of business activities at the home office of the employee lacks a certain degree of permanency, and the home office is not at the disposal of the foreign enterprise.
If, however, the home office is used on a continuous basis for carrying on the business activities even after the COVID-19 crisis, and from the facts and circumstances it is observed 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 and may constitute a permanent establishment.
As per OECD commentary, a construction site should not be regarded as ceasing to exist when work is temporarily discontinued. Therefore, the temporary interruptions of construction activities due to the COVID-19 emergency should be included in computing the duration of a site and in determining whether such a site constitutes a permanent establishment.
Where an employee, partner, or agent of a non-resident foreign corporation continues to be present in the Philippines, and the presence is due to travel restrictions related to COVID-19, then such presence (i.e., an extended period of the day shall not be considered) in the Philippines will not be considered for income tax purposes for the company on whose behalf the employee, partner, or agent has been acting.
In sum, the effects of COVID-19 will not result in the creation of a permanent establishment if the following requirements are met:
- The non-resident foreign company did not have a permanent establishment in the Philippines before the effects of COVID-19;
- There are no other changes in the company's circumstances except for the extended stay of its employee, partner, or agent in the Philippines because of travel restrictions; and
- The employee, partner, or agent should leave the country as soon as the circumstances would permit.