Tax Implications of Representative Office in Philippines

By: Garry S. Pagaspas

Multinational companies and foreign corporations are allowed to do business in the Philippines as a representative office in the Philippines under the Corporation Code of the Philippines (Batas Pambansa Bilang 68), Foreign Investments Act (Republic Act No. 7042), and related implementing rules and regulations. Under this, a foreign corporation’s legal entity abroad is being licensed to do business in the Philippines through a formal application form (SEC Form No. F-104 and related documentations) as a representative office of liaison office is a cost center entity fully subsidized by the parent company but could deal directly with clients of the parent company abroad undertaking activities such as but not limited to information dissemination and promotion of parent company’s products as well as quality control of products. Based on such operations, let us take up the Bureau of Internal Revenue (BIR) tax implications of representative office in the Philippines as follows:

Income tax exemptions of Representative Office in Philippines

The representative office is licensed to do business in the Philippines and not allowed to engage in income producing activities, as such, for tax purposes, it is classified for tax purposes as a non-resident foreign corporation not engaged in trade or business in the Philippines. Not being allowed to earn income from operations, it is exempted from income tax in the Philippines. Some BIR rulings provides that the same is exempt from filing of the corporate income tax return (ITR). However, with the Securities and Exchange Commission’s (SEC) requirements of annual audited financial statements of a representative office in Philippines with stamp received by the BIR and in relation for the annual income tax return for exempt entities (BIR Form No. 1702 EX), filing of annual income tax returns seems applicable, if not practical.

In some opinions of the Securities and Exchange Commission (SEC), it clarified that what is prohibited is the operational income for the representative office and it could earn passive income such as trading of listed shares. In such instance, the representative office shall be subject to the corresponding tax on such passive income, e.g. stock transaction tax on listed shares.

Learn more about Income Taxation in the Philippines, click HERE.

Value-added Tax (VAT) exemptions of Representative Office in Philippines

VAT is imposed upon those engaged in trade or business and as such, representative office is exempted from VAT on sales, not being engaged in any income-generating business activity in the Philippines. Such VAT exemption of representative office in Philippines applies only to VAT directly due from representative office in Philippines. This would mean that representative offices can be passed on 12% VAT by suppliers such as for utilities, office rental, professional services, and etc. Learn more about Value Added Tax in Philippines, click HERE.

Expanded/ Final Withholding Tax obligations of Representative Office in Philippines

Representative office in Philippines is also constituted as withholding agent with respect to its income payments in the Philippines subject to creditable/ expanded withholding tax (CWT/ EWT), or final withholding tax (FWT) in the Philippines. Accordingly, it is required to file BIR returns and reports related to withholding taxes (e.g. BIR Form No. 1601Q, BIR Form No. 1604s, alphalist of payees, etc.).

Withholding tax on compensation of Representative Office employees

Representative office in Philippines is also constituted as withholding agent with respect to its compensation payments to employees – local and expatriates based on the applicable rates under the Tax Reform for Acceleration and Inclusion (TRAIN) or Republic Act No. 10963 effective January 1, 2018 as follows:

• 20-35% graduated tax rates for local employees
• 20-35% graduated tax rates for resident expatriates
• 25% for non-resident expatriates, not engaged in trade or business in the Philippines

Representative office in Philippines is likewise required to withhold fringe benefits tax of 35% of grossed up monetary value under the Tax Reform for Acceleration and Inclusion (TRAIN) or Republic Act No. 10963 effective January 1, 2018 on fringe benefits to managerial and supervisory employees, and file related returns and reports. Learn more about the following:

• Fringe Benefits Tax in the Philippines, click HERE.
• Withholding tax on compensation in Philippines, click HERE.

Garry is a Certified Public Accountant (CPA) and a law degree holder in tax practice for about fifteen (15) years now helping out taxpayers on company registrations in Philippines, tax compliance, tax savings, tax assessments, tax refunds, and other related professional tax services. He has been helping out some foreign clients determine the most appropriate legal entity to register in the Philippines based on intended operations, the eventual registration of such legal business entity and other related professional services. He is presently a frequent speaker of Tax and Accounting Center, Inc. and you may send him mail at garry.pagaspas(@)taxacctgcenter.ph.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances.