[Ask The Tax Whiz] Foreign businesses: What you need to know about them

How do foreign/multinational companies conduct business in the Philippines?

Under the Tax Code, a foreign corporation is one that is not created or organized in the Philippines or under Philippine laws. Multinational companies, on the other hand, may conduct business in the Philippines in two ways:

• Regional/Area Headquarters (RHQs): Administrative branch that doesn’t generate income but focuses on providing supervisory, communication, and coordination services, which is under the nonresident foreign corporation.
• Regional Operating Headquarters (ROHQs): A branch established to earn income and provide various qualifying services, which is under the resident foreign corporation.

What are the tax implications of regional/area headquarters and regional operating headquarters?

RHQs are not subject to income tax and value-added tax since they do not derive income in the Philippines.

On the other hand, ROHQs are now subject to regular corporate income tax of 25% under the CREATE Law beginning January 1, 2022. Moreover, they are also subject to a 2% minimum corporate income Tax (MCIT). Previously they were subject to a preferential rate of 10%. In addition, they are subject to a 12% Value Added Tax for services rendered in the Philippines. Also, the branch profit remittance tax is subject to 15% from any profit remitted by a branch to its head office.

However, specific incomes received by a foreign corporation will not be treated as branch profits unless directly trading in the Philippines.

Do the employees of multinational companies get preferential tax rates?

No. Under the TRAIN Law, the preferential income tax rate of 15% of employees of RHQs and ROHQs of multinational companies, offshore banking units, and petroleum service contractor and subcontractor will no longer be applicable. As a consequence to this removal of preferential rates, the employees of multinational companies in the Philippines are now subject to the regular income tax rate.

However, preferential tax rates pursuant to existing international tax treaties may still be applied if deemed appropriate.

Who is authorized to avail of treaty benefits to avoid double taxation, and what aspects do I need to understand in order to access these benefits?

The BIR issued RMO No.14-2021, which applies to all sources of income obtained by nonresident taxpayers from the Philippines, qualifying for relief from double taxation as per the applicable tax treaty. There are general requirements that must be complied with by all filers and specific requirements based on particular transactions when claiming relief from double taxation.

Residents of either or both contracting states can access tax treaty benefits. Nonresident recipients of income must comply with a tax residency certificate issued by their country’s tax authority to confirm their residency. The Philippines has currently entered into tax treaties with 43 countries, outlining specific tax regulations and benefits for eligible residents of these nations.

What tax issues do the regional operating headquarters have in relevance to the Organization for Economic Cooperation and Development (OECD)?

In 2021, the Department of Finance successfully removed the Philippines from the OECD’s “harmful tax regimes” list by addressing the potential harm it was previously associated with. This was achieved through the elimination of preferential tax rates that were previously granted to ROHQs. The OECD’s Forum on Harmful Tax Practices (FHTP) deemed the special tax rates for ROHQs unfair due to the advantages they provided to foreign taxpayers, the discrimination against local taxpayers, and the lack of a requirement for recipients to demonstrate adequate substance in their activities. With the implementation of the CREATE Act, these tax perks were eliminated, subjecting ROHQs to the general corporate income tax rate.

Are you a foreign company running a business in the Philippines and eager to address your tax implications, treaty benefits, and changes in tax laws? Book a consultation now through the TaxWhizPH Mobile App. – Rappler.com