Income Tax Classification of Expatriates in Philippines

By; Tax and Accounting Center Philippines

For foreign investors, one consideration on foreign investments in the Philippines is the payroll tax of its expatriates employees who will man the operations in the Philippines. For income tax purposes, an expatriate employee in the Philippines may be taxed as follows:

Non-resident alien/expatriate in the Philippines

An non-resident alien/expatriate in the Philippines is one who is not a citizen of the Philippines and who is not a resident of the Philippines but deriving income as employee in the Philippines. He is classified either as a non-resident alien:

1. Not engaged in trade or business, or,
2. Engaged in trade or business

The determining factor is the aggregate length of presence in the Philippines. Under Section 25(A)(1) of the Philippines Tax Code, a non-resident alien who stayed an aggregate period of more than 180 days during any calendar year shall be deemed a non-resident alien doing business in the Philippines. In BIR Ruling No. 056-05, the BIR ruled that “any calendar year” covers all the months in the calendar year covered by the period of assignment of the expatriate in the Philippines.

A non-resident expatriate in the Philippines not engaged in trade or business in the Philippines is subject to 25% withholding tax on gross compensation. On the other hand, as non-resident expatriate engaged in trade or business in the Philippines is taxed at 5-32% of compensation income after deductions for personal exemptions (P50,000.00 basic personal exemptions, and P25,000 additional personal exemptions for every qualified dependent child up to four or up to P100,000).

Resident alien/expatriate in the Philippines

A resident alien in the Philippines is a non-Filipino citizen whose residence is within the Philippines. This is a matter of intention to reside in the Philippines and length of stay in the Philippine such as when his employment contract in the Philippines would require his presence in the Philippines for the entire taxable year.

A resident expatriate in the Philippines is taxable at 5-32% income tax rates in like manner as a Filipino citizen using the withholding tax table on compensation.

Special alien employees/expatriate in the Philippines

To encourage relocation of multinational companies and establishing certain entities in the Philippines, managerial and technical employees of the following entities in the Philippines are taxed at a lower tax rate of 15% of gross compensation income:

1. Expatriates of Regional or Area Headquarters of Multinational Companies (RAHQ)
2. Expatriates of Regional Operating Headquarters of Multinational Companies (ROHQ)
3. Expatriates of Offshore Banking Units (OBU)
4. Expatriates of Petroleum Service Contractor and Subcontractor

The 15% is made as a final withholding tax because the rate constitutes final payment of income tax on such gross income that the expatriate receives such as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances from such employment.

Summary

Based on the above income tax classifications, the length of stay and intention of the expatriate in the Philippines dictates their tax classification. Due care should be exercised in their classification to avoid misapplications of tax rates and do away with penalties for misapplications.

For further reading on the income taxation of expatriates, please read further on our other article on Income Taxation of Expatriates in the Philippines.

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.