Tax Obligations Under the Philippines-Korea Double Taxation Agreement for Relocating Employers

Introduction

The Convention between the Republic of the Philippines and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter referred to as the "Philippines-Korea DTA") serves as a critical framework for managing cross-border tax liabilities, particularly in scenarios involving relocating employers. Signed on February 9, 1984, and entering into force on September 1, 1986, this bilateral agreement aims to eliminate double taxation on income earned by residents of one contracting state in the other, while fostering economic cooperation between the two nations. From a Philippine perspective, the DTA is integrated into domestic tax laws under Republic Act No. 8424 (the National Internal Revenue Code of 1997, as amended) and is administered by the Bureau of Internal Revenue (BIR).

Relocating employers—typically multinational corporations or businesses transferring operations, personnel, or establishing branches between the Philippines and Korea—face specific tax obligations under the DTA. These include withholding taxes on employee salaries, corporate income taxes on business profits, and compliance with residency rules. This article provides a comprehensive examination of these obligations, drawing on the DTA's provisions and their application in Philippine tax practice. It covers residency determination, taxation of employment income, business profits, permanent establishments, withholding requirements, relief mechanisms, and administrative considerations.

Residency and Tie-Breaker Rules

Under Article 4 of the Philippines-Korea DTA, tax residency is a foundational concept determining which state has primary taxing rights. A "resident" is defined as any person liable to tax in a contracting state by reason of domicile, residence, place of management, or any other criterion of a similar nature.

For employers relocating between the two countries, residency status affects overall tax exposure. If an employer is a corporation, it is considered a resident of the state where its place of effective management is situated. In cases of dual residency, the tie-breaker rules apply: the state where the place of effective management is located takes precedence. If unresolved, mutual agreement between Philippine and Korean tax authorities is required.

From the Philippine viewpoint, the BIR assesses corporate residency based on incorporation under Philippine laws or effective management within the country. Relocating employers must file for a Taxpayer Identification Number (TIN) and update their registration with the BIR if shifting operations to the Philippines, ensuring compliance with Section 23 of the Tax Code, which taxes resident foreign corporations on Philippine-sourced income.

Permanent Establishment and Business Profits

A key concern for relocating employers is the creation of a "permanent establishment" (PE) under Article 5 of the DTA. A PE includes a fixed place of business through which the enterprise carries on its activities, such as a branch, office, factory, or construction site lasting more than six months. Supervisory activities related to construction or installation projects exceeding six months also qualify as a PE.

For employers relocating to the Philippines, establishing a PE triggers taxation on attributable business profits under Article 7. Profits are taxable only in the resident state unless a PE exists in the other state, in which case the host state taxes profits allocable to the PE. Allocation follows arm's-length principles, akin to transfer pricing rules under BIR Revenue Regulations No. 2-2013.

Philippine tax obligations for such employers include a 30% corporate income tax (CIT) on net income attributable to the PE, reduced from 35% under Republic Act No. 11534 (CREATE Act). Additionally, a 12% value-added tax (VAT) may apply to goods and services sold within the Philippines. Relocating employers must register as a withholding agent for branch remittance tax (15% on profits remitted to the head office) and comply with quarterly income tax returns (BIR Form 1702Q).

If no PE is created—e.g., through short-term relocations or dependent agents without authority to conclude contracts—the business profits are exempt from taxation in the host state.

Taxation of Income from Employment

Article 15 addresses income from employment, which is particularly relevant for employers relocating employees (expatriates) between the Philippines and Korea. Salaries, wages, and similar remuneration are taxable only in the resident state unless the employment is exercised in the other state.

The "183-day rule" provides an exemption: if the employee is present in the host state for not more than 183 days in any 12-month period, the remuneration is paid by a non-resident employer, and the cost is not borne by a PE in the host state, then the income is taxable only in the resident state.

For Philippine-based relocating employers, this means:

Korean employees relocated to the Philippines for over 183 days are subject to Philippine income tax on their salaries at graduated rates (0-35% under the Tax Code).
Employers must withhold taxes monthly using BIR Form 1601C and remit them within specified deadlines.
If the employee qualifies for exemption, the employer must secure a certificate of tax treaty relief from the BIR via Revenue Memorandum Order No. 72-2010, submitting documents like employment contracts and proof of non-PE status.

Conversely, Philippine employees relocated to Korea face similar rules, with Korean withholding obligations applying if the 183-day threshold is exceeded. Employers must ensure compliance to avoid penalties, which in the Philippines can reach 25% surcharge plus 12% interest per annum.

Dividends, Interest, and Royalties

Relocating employers often involve intra-group payments, covered under Articles 10 (Dividends), 11 (Interest), and 12 (Royalties).

Dividends: Taxable in the source state at a reduced rate of 15% (or 10% if the beneficial owner holds at least 25% of the paying company's capital). In the Philippines, this aligns with the 10% final withholding tax on dividends to non-residents under Section 28(B)(5) of the Tax Code, but DTA relief caps it accordingly.
Interest: Limited to 15% in the source state, with exemptions for government-related loans.
Royalties: Capped at 15% for copyrights, patents, etc.

Employers must apply for treaty relief rulings from the BIR to avail of reduced rates, filing BIR Form No. 0901 with supporting documents. Failure to do so results in default domestic rates (e.g., 20% on interest and royalties).

Other Income and Capital Gains

Article 21 covers other income, taxable only in the resident state unless derived from the other state, in which case both may tax with credit relief.

Capital gains (Article 13) from immovable property are taxable in the situs state, while gains from movable property forming part of a PE are taxable in the PE's state. For relocating employers selling assets during relocation, this could trigger Philippine capital gains tax (6% on real property or 15% on shares not traded on the stock exchange).

Methods for Elimination of Double Taxation

The DTA employs the credit method under Article 23. In the Philippines, residents receive a tax credit for Korean taxes paid, limited to the Philippine tax on the same income (Section 34(C)(3) of the Tax Code). Korean residents similarly credit Philippine taxes.

Relocating employers must maintain detailed records, including foreign tax receipts, to claim credits during annual tax filings (BIR Form 1702 for corporations).

Administrative Provisions and Compliance

Article 25 mandates exchange of information between the BIR and Korea's National Tax Service to prevent evasion. Relocating employers should anticipate audits and information requests.

In Philippine practice, compliance involves:

Securing a ruling from the BIR's International Tax Affairs Division for treaty benefits.
Adhering to transfer pricing documentation under Revenue Regulations No. 2-2013, especially for related-party transactions during relocation.
Reporting requirements under the Tax Code, including annual information returns for withholding taxes.

Penalties for non-compliance include fines up to PHP 50,000 per violation and potential imprisonment. Employers are advised to consult tax professionals for tailored advice, as interpretations may evolve with BIR issuances.

Special Considerations for Relocating Employers

Branch vs. Subsidiary: Relocating via a branch creates a PE, subjecting profits to host-state tax, while a subsidiary may qualify as a separate resident entity.
Social Security and Pensions: While not directly under the DTA, related agreements (e.g., Philippines-Korea Social Security Agreement of 2009) exempt relocated employees from dual contributions for up to five years.
COVID-19 and Remote Work: Post-pandemic BIR guidance (e.g., Revenue Memorandum Circular No. 83-2020) clarifies that temporary remote work does not automatically create a PE, but prolonged relocations may.
Amendments and Protocols: The DTA has no major protocols as of recent knowledge, but ongoing OECD BEPS initiatives influence interpretations, such as anti-abuse rules under Article 26.

Conclusion

The Philippines-Korea DTA provides a balanced mechanism for relocating employers to navigate tax obligations, promoting cross-border mobility while safeguarding revenue interests. By adhering to residency rules, PE thresholds, and relief procedures, employers can minimize double taxation risks. In the Philippine context, proactive engagement with the BIR ensures compliance and optimizes tax positions. As global business evolves, staying abreast of administrative updates remains essential for effective relocation strategies.