Tax Notes: Clarifications on the treatment of alien individuals employed in the Philippines

IN CONNECTION with section 4C of Bureau of Internal Revenue (BIR) Revenue Regulations (RR) 8-2018, which provides that, “All concerned employees of regional or area headquarters and regional operating headquarters of multinational companies, offshore banking units and petroleum service contractor and subcontractor shall be subject to the regular tax rate,” the BIR issued Revenue Memorandum Circular (RMC) 116-2019 on Oct. 18, 2019.

RMC 116-2019 clarifies that the respective incomes of alien individuals employed by the abovementioned entities are now similarly taxed as income of regular employees of locally established entities. As such, these alien individuals are subject to the same administrative requirements of the BIR being imposed on other regular employees, such as substituted filing, issuance of BIR Form 2316 and inclusion in the monthly withholding tax remittance on compensation and in the prescribed alphalists.

Further, alien individuals employed by foreign principals and assigned to render services exclusively to these local entities, otherwise known as “seconded employees or secondees,” are likewise subject to regular income tax rates. It is grounded on the principle of situs of taxation, considering that the services rendered by these alien individuals are performed in the Philippines, regardless of whether their salaries are being paid by the foreign principals or advanced by these local entities.

These local entities to whom the “seconded employees” render their service shall, thereby, comply with the same administrative requirements imposed by the BIR for regular employees, except for substituted filing. In addition to these prescribed requirements, the following procedures shall be complied with by all concerned entities:

(a) A separate employment status and description for “seconded employees” shall be provided in the “Current Employment Status” of the Alphabetical List of Employees/Payees from Whom Taxes Were Withheld under BIR Form 1604C, as well as in the Alphalist Data Entry and Validation Module version 6.1.

(b) These “seconded employees” shall file their annual income tax return and pay the income tax due, if applicable on or before the prescribed deadline of April 15 of each year, with the attached BIR Form 2316 duly issued by the local entities.

(c) In all copies of the BIR Form 2316 to be issued to these employees, the phrase “For Seconded Employee” shall be typed or printed in bold capital letters enclosed in parentheses immediately under the form’s title “Certificate of Compensation Payment/Tax Withheld.”

(d) In case of termination of their services before the end of the taxable year, the local entities shall ensure that the withholding tax on their last salaries shall be computed using the annualized withholding tax method, pursuant to the provisions of section 2.29(B)(5)(b) of RR 2-98, as amended.

Please be guided accordingly.

Source: P&A Grant Thornton

Certified Public Accountants