Income Taxation of Expatriates in the Philippines

By: Tax and Accounting Center Philippines

With the boom of the business process outsourcing industry in the Philippines, it is undeniable that foreign expatriates is accordingly increasing in number. Hereunder are the few reminder on how income taxation applies to compensation of expatriates in the Philippines. For better appreciation of this article, we suggest that you read first our article on Income Tax Classification of Expatriates in the Philippines.

Withholding tax on compensation of expatriates in Philippines

The taxable compensation of expatriate refers to the compensation received by the expatriate for its services performed in the Philippines. For resident expatriate and non-resident expatriate engaged in trade or business, withholding tax on compensation table is used for the purpose. The 2009 withholding tax table is patterned after the income tax rates of 5-32% where the applicable tax rate in any tax bracket corresponds to the level of compensation of expatriates. Yes, deductible personal exemptions had already been considered.

For non-resident expatriate not engaged in trade or business, the same is withheld at the straight rate of 25%, while the special alien employee is withheld at the straight rate of 15%. Notably, some tax treaties provides some  tax exempt compensation of expatriates in the Philippines (e.g. the 90-day rule under RP-U.S. Tax Treaty and you need to secure a Tax Treaty Relief Application with the International Tax Affairs Division with the Bureau of Internal Revenue.

Under BIR Ruling No. 192-2008, compensation paid abroad under an split-pay arrangement is likewise taxable in the Philippines. The reason is that such payment relates to services performed in the Philippines in line with the rule that services are taxable in the place where the same is rendered.

Withholding tax on compensation of expatriates in the Philippines is the obligation of the employer with respect to its compensation payments made in the Philippines – direct payments and indirect payments for offshore compensation charged back by the foreign counterpart. For compensation paid abroad and which is not charged back, the employer is no longer responsible same as it does not any control of payment. Instead, it will be the responsibility of the expatriate to report in its income tax return and pay the corresponding taxes.

For more readings, please read our article on Features of Withholding Tax on Compensation.

Fringe benefits tax of expatriates in Philippines

Fringe benefits  tax is imposed upon the employer for expatriates benefits on top of its taxable compensation such as housing privilege, motor vehicles, personal expenses shouldered by the employer. It is intended to recover the lost withholding tax on compensation so that the tax computation is premised on the fact that the expatriate gets an amount net of applicable tax.

Accordingly, computing for the fringe benefits tax requires grossing up the monetary value of the fringe benefit and the tax rates vary based on the income tax classification of the expatriate as follows:

1. Non-resident alien not engaged in trade or business – 25% of the grossed-up monetary value;
2. Resident alien – 32% of the grossed up monetary value
3. Special alien expatriates – 15% of grossed-up monetary value

Fringe benefits tax is filed and paid quarterly using BIR Form No. 1603. For more readings, please read our article on Fringe Benefits Tax in the Philippines.

De minimis benefits of expatriates in the Philippines

De minimis benefits are benefits of relatively small values provided by the employer for the general welfare of the employees. The regulations provide 10 de minimis benefits and this may extend to expatriate employees. These benefits are exempt from income taxation and accordingly, withholding tax on compensation to the extend limited by law. For more ot it, please refer to our article on Tax Exempt De Minimis Benefits. 

Filing of annual individual income tax return

Under Section 51 of the Philippines Tax Code, every alien residing in the Philippines and every non-resident alien engaged in trade or business are required to file an income tax return in the Philippines ( BIR Form No. 1701 for engaged in trade or business or practice of profession and BIR Form No. 1700 for pure compensation income earners).  Under the substituted filing of Revenue Regulations No. 2-98, as amended, an individual earning pure compensation income from a single employer on which withholding tax on compensation had been properly withheld, it shall no longer be required to file an income tax return.

Applying the above, resident expatriates and non-resident expatriates engaged in trade or business in the Philippines are required to file income tax return, except under substituted filing where the Certificate of Withholding Taxes on Compensation or BIR Form No. 2316 would suffice for the purpose. If they would claim tax credits in their home country, they may use such BIR Form No. 2316 or alternatively, they may file income tax return at their option.

We likewise submit that those under split pay arrangement where salaries are paid abroad but is not charged back are required to file their respective income tax return in the Philippines and paying the related income tax due thereon. The withholding tax of 25% for non-resident expatriate not engaged in trade or business, and the 15% tax on special alien employee are final taxes. As such, we submit that are no longer required to file an income tax return under Section 51(2)(c).

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. For comments, you may please send mail at in**@ta************.org.