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Let's Talk Tax

Implications of COVID-19 Pandemic on Permanent Establishments

The global pandemic COVID-19 has proven to have an arduous effect on our society and economy. Recently, the Philippine government presented a range of different measures to combat against the danger of the COVID-19 virus. Among these are the imposition of quarantine measures such as the Enhanced Community Quarantine (ECQ), Modified Enhanced Community Quarantine (MCQ) and General Community Quarantine (GCQ) and travel restrictions.

The continued implementation of these measures raised several international tax issues related to cross border workers or the unintended creation of permanent establishment (PE). Due to airport closures and the suspension of international flights, many foreign employees of assigned in the Philippines have been trapped for an undetermined length of time. The presence of these foreign national employees in our country pose a risk of creating a PE for their employees.

The concept of PE is applicable to a foreign corporation which is organized other than the law of the Philippines and is not engaged in trade or business within the Philippines which is classified, for tax purposes, a nonresident foreign corporation (NRFC) and to a person who is non-resident and not engaged in trade or business in the Philippines.

PE as defined in most treaties means a fixed place of business through which a resident of one of the contracting states engages in a trade or business. It especially includes a place of management; a branch; an office; a factory; a workshop; and a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. Its existence, however, requires permanency and not merely temporary or transitory, and through which the business of an enterprise is being carried on.

The term PE also comprises the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if the activities of that nature continue for a period or periods aggregating of more than, generally, 183 days in any 12-month period. This is the most common source of a PE.

When a foreign enterprise establishes to carry on business in the Philippines through a PE, the income that is due to that PE is subject to income tax in the Philippines. As such, income taxes due on their income derived from sources within the Philippines shall also be subject to final withholding taxes. Accordingly, the Philippine customer/payor of the income shall be required to withhold final tax on the gross amount of income.

In order to address the unintended creation of a PE due to Philippine lockdowns, the Bureau of Internal Revenue (BIR) recently issued the Revenue Memorandum Circular (RMC) No. 83-2020 entitled as “Tax implications of Measures Being Implemented to Prevent the Spread of New Coronavirus Disease 2019 (COVID-19) on Cross-Border Matters.

According to the RMC, because of the pandemic, many employees of foreign enterprises in the Philippines are working at home in compliance with the government imposition of strict home quarantine measures and not in compliance with the enterprise’s requirement. Working from home will not create a PE, since a PE should have a degree of permanency and be at the disposal of an enterprise for it to be considered a fixed place of business.

In our case, working from home is only temporary in nature and is only because of the government mandate due to the pandemic. Moreover, the government imposed the said working set-up and not the foreign enterprise.

For example, based on RMC, Mr. X a non-resident alien was sent by his Singaporean employer in the country on January 1, 2020 to work for a domestic company for a period of 90 period of days. He was supposed to return to Singapore on March 31, 2020 but because of the travel restrictions imposed in the Philippines he was prevented from leaving the country. He has been renting an apartment in Makati City.

Under the Philippine-Singaporean tax treaty, the State where the employment is exercised may tax the employee on his employment income if he is present in the host state for more than 183 days. However, given our exceptional state, the Philippines will relax the application of the relevant treaty provisions on employment income. Therefore, even if Mr. X stays here for more than 183 days, his tax residence will not change due to temporary dislocation. Singapore shall still exercise its exclusive right to tax the employment income of Mr. X, except when the domestic company appears to be the real employer or when his remuneration is borne by a permanent establishment of the Singaporean employer in the Philippines.

On the other hand, the temporary interruptions on construction activities in the Philippines due to COVID-19 pandemic will be included in computing the duration of a site and in determining whether such construction site constitutes a PE.

Furthermore, in order for a person to be considered as dependent agent of a PE the following conditions needs to be present, namely: a person acts in a Contracting State on behalf of an enterprise; in doing so, that person habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise (it must be established that the presence of a foreign enterprise in the Philippines is not merely transitory); and these contracts are either in the name of the enterprise or for the transfer of the ownership of, or for the granting of the right to use, property owned by that enterprise of that the enterprise has the right to use, of for the provision of services by that enterprise.

To better understand, let us look at this example given by the RMC.  Mr. X is an employee of ABC Company, a foreign corporation incorporated and based in Japan. He was in the Philippines for a two-week vacation when the Philippine government imposed travel restriction and was prevented from leaving the country. His duties and obligations involves concluding contracts on behalf of his foreign employer. While in the Philippines during the travel restrictions, he would habitually conclude contracts on behalf of his employer. Would this result in the creation of PE in the Philippines?

The answer is no said the RMC, because Mr. X would not have been present in the Philippines save for COVID-related travel restrictions. His stay in the Philippines is only a result of the COVID-19 pandemic, therefore, his habitual conclusion of contracts in the Philippines on behalf of ABC Company is not considered to constitute a PE of the foreign company in the Philippines because his stay here is only temporary. Had it not been for the travel restrictions, Mr. X would have been regularly performing his duties in Japan.

Hence, when an employee, partner or agent of a non-resident foreign corporation continues to be present in the Philippines because of the travel restriction related to COVID-19, his period of stay will not be considered in counting the taxable presence of the non-resident foreign corporation in the Philippines.

However, the effect will, be different if the employee, partner or agent was habitually concluding contracts on behalf of the enterprise in the Philippines before the COVID-19 crisis.

Briefly, the effects of COVID-19 will not result in the creation of PE if the following requisites are present: the non-resident foreign company did not have a PE in the Philippines before the effects of COVID-19; 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 the employee, partner or agent should leave the country as soon as the circumstances would permit.

The RMC was issued on the assumption that the COVID-19 pandemic is exceptional and provisional in nature. If the pandemic continues and the situation today will become the “norm” rather than exception. In that case, this assumption may need to be re-visited and re- evaluated. No one knows when this pandemic will end, but what the Philippine government can do is the continued issuance of relevant regulations that can eliminate or at least lessen the effect of the pandemic in cross border transactions.

Let's Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.

Grace L. Turqueza is an associate from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd. For comments and inquiries, please email


As published in BusinessWorld, dated 25 August 2020